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Friday, January 9, 2009

Ilargi: My partner in crime Stoneleigh sometimes doesn't know how good the things she writes are. She wrote this in a comment section a couple day ago, but it deserves far more attention.

Stoneleigh:

Welcome to the Gingerbread Hotel

Bailouts are NEVER for the little guy no matter what spin their proponents use to sell them to the public (who will be paying for them through their taxes). The role of the little guy in a Ponzi scheme is to be the empty-bag holder. This is the tragedy of our times, and there's nothing anyone can do to prevent it, whether or not they might want to. The losses have already occurred, but as yet still lie out of sight in illiquid 'asset' accounts supposedly worth hundreds of trillions of dollars, but actually worth close to nothing.

A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, by encouraging them to buy far more than they could actually afford on margin (ie with borrowed money). That is a recipe for paying far over the odds for everything, while the financiers collect the excess - an excess collected preferentially from those near the bottom of the income scale, who were most likely to carry a perpetual credit balance at a predatory rate. This is how credit bubbles form - a combination of predators and all-too-willing prey that doesn't understand the nature of the trap. Hansel and Gretel and the witch's Gingerbread House comes to mind, minus the escape at the end.

Unfortunately, it was easy to entice people into debt slavery, as the offer of access to material goods is always hard to resist, particularly when it seems like everyone else is enjoying new-found wealth. It doesn't take long to convince people that they deserve to have a large home, multiple cars and all manner of consumer goods, or to convince them that they are somehow inadequate and that their children will suffer if they don't participate in the consumer culture. The relentless marketing barrage played on our insecurities, conveying a message that happiness and social status could, and should, be bought.

A situation where ordinary people are able to buy anything on margin is historically very rare, as credit is normally only extended to those who do not need it. The last several decades have been an aberration, largely due to an increasingly reckless attitude towards risk. For ordinary people, low interest rates led them to believe that huge debt burdens could be sustained so long as the budget could be stretched to cover the monthly payment. For those higher up the financial food chain, the process of securitization created the appearance that risk could be passed on ad infinitum, until it ceased to exist. Unfortunately, low interest rates are a trap, and securitization, instead of minimizing or eliminating risk, actually magnified it into a systemic threat.

In terms of mortgages, even those that seemed conservative in recent years were not. In the latter stages of a credit bubble, even a deposit of over 50% and a monthly payment that could be covered by one of two salaries is a recipe for deep trouble. We are looking at a collapse of property prices and a huge rise in unemployment, which will combine to cause an unprecedented amount of negative equity, defaults and foreclosure, and, thanks to leverage, the resulting loses will snowball, further undercutting the supposed value of financial assets. The 'conservative' mortgagees are mostly just as trapped as those who over-extended themselves further.

Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse.

The middle class has been comprehensively fleeced by the debt trap, and the consequences for social stability will be extremely unpleasant once the chickens come home to roost. Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout. Whether we've been gorging ourselves on the Gingerbread House or merely nibbling at it, we now find ourselves in a cage.

Ilargi: I just thought of a new nickname for Roubini, whose drinks, like Krugman’s, seem to have been laced with happy pink pills for the past while. I suggest we refer to Nouriel from now on in as Dr. Doomlittle.

The U.S. recession will last two full years, with gross domestic product falling a cumulative 5%, said Nouriel Roubini, chairman of RGE Monitor. Roubini was one of the first economists to predict the recession and the credit crunch stemming from the housing bubble. For 2009, Roubini predicts GDP will fall 3.4%, with declines in every quarter of the year.

The unemployment rate should peak at about 9% in early 2010, he said. Consumer prices will fall about 2% in 2009. Housing prices will probably overshoot, dropping 44% from the peak through mid-2010. "The U.S. economy cannot avoid a severe contraction that has already started and the policy response will have only a limited and delayed effect that will be felt more in 2010 than 2009," he said.

Two sets of rules on Wall Street, 50 billion Ponzi scheme by Bernard Madoff uncovered, court case for the toxic waste coverup, Paulson's efforts are futile, commercial and residential real estate market alike now frozen, Fed is frantic, an elitist engineered collapse of the U.S, derivative problems galore, and no real debate taking place in government As we know there are two sets of rules in banking and on Wall Street - one for the anointed and one for everyone else. The anointed never go to jail for their crimes.

On Friday, it was reported that former Nasdaq stock market chairman Bernard Madoff was arrested for running a fraudulent investment business that lost $50 billion before he confessed to senior employees it was a "giant Ponzi" scheme. Federal investigators working through the weekend to unravel Bernard Madoff’s alleged $50 billion Ponzi scheme found evidence he ran an unregistered money-management business alongside his firm’s brokerage and investment-advisory subsidiaries, two people with knowledge of the inquiry said. Clients of the undisclosed unit may have included hedge funds, according to the people, who declined to be identified or to name the funds because the probe isn’t public. Investigators from the U.S. Securities and Exchange Commission are looking for signs that others participated in the alleged fraud and are examining why Madoff’s wife’s name appeared on documents linked to transactions under scrutiny, the people said. His wife, Ruth Madoff, has not been accused of any wrongdoing.

We now are faced with another budding scandal, which is engulfing Robert Rubin, former Treasury Secretary under Bill Clinton and his former disciple Chuck Prince for their roles in another Ponzi scheme that is now choaking world banking. They and their accomplices over the past five years are named in a federal lawsuit for an alleged complex cover-up of toxic securities, which was administered worldwide. They caused part of what you see in CDO, Collateralized Debt Obligations, which have been responsible for trillions of dollars in losses. These disastrous securities that were sold by Citibank were off the books in shell entities. The actions of Rubin and his partners in crime were responsible for the collapse of Citigroup, which wiped out $122 billion in shareholder value.

What is equally onerous to shareholders is that Rubin and his gang of accomplices were able to hold Citigroup’s shares up in value while they cashed out $150 million worth - stock sales that were suspicious and calculated to maximize the personal benefits from undisclosed inside information. A trait Wall Street elitists are famous for. Rubin made $30.6 million on the deal. What more would you expect from the masters of the universe? Considering this suit we see a winter of deep discontent. It is the apparent result of twisted ideology or manifest sociopath behavior. Financial innovation was just another ruse to empty the pockets of the investor. This was an age of mitigating risk by spreading it throughout the system. It was thought that this would blunt the negative force of such scams. It did not work. This is what we forecast six years ago and which only became realty 1-1/2 years so. When the results of such antics began to take the financial system down.

Americans and others have no idea what is going on nor do they understand the gravity of the situation. This is an event that only happens once every 500 to 1,000 years. This is going to be one of the granddaddies of all collapses.

The elitists had to play boosting the value of real estate to dizzying heights and then burying it in structured finance. In a world of stable real estate prices, SIV’s and CDO’s were relatively risk free, but this was not a stable environment. Professionals should have realized that normal rules didn’t apply. Foreign banks, hedge funds, insurance companies and other institutions bought 70% of what became toxic waste, as they poured dollars back into the US economy supplying at times $3 billion a day in investment to keep America from going bankrupt. The buyers knew that lending practices had changed dramatically and that risk had increased exponentially. Eighty percent of mortgages were being securitized.

Greed drove all the players from the borrowers to the buyers of what became toxic garbage. A daisy chain of corruption and greed. The buyers were not happy with a better yield, they had to borrow money and leverage the CDOs and SIVs 30 to 100 to one. As you know we have just witnessed the de-leveraging of this process and the devastating effect it has had on all markets and the world economy. The elitists got the ball rolling by getting revenge on Bear Stearns by financially assassinating them and looting the valuable assets of the company. The recipient was JP Morgan Chase, a major owner of the Federal Reserve, which you loaned $29 billion to pull off this theft. This started the de-leveraging and the run on the derivatives. Lehman Brothers was next and their demise caused even more havoc.

Just prior to that was the collapse of Fannie Mae and Freddie Mac, both derivative borne disasters. Taxpayers are on the hook for $9.4 trillion and climbing. The Fed refuses to say who received their largess and what the terms are. Citigroup will cost $1 trillion and AIG $500 billion. The Treasury is backstopping $600 trillion in derivatives and the Fed and the Treasury are doing the same for the entire structured finance segment. The latter and municipal bonds are essentially frozen. There are few buyers.

On both Wall Street and in Congress, the same old crooks and party hacks who succeeded in producing the greatest economic crisis since the Great Depression have now ended up with even more power and more control than they had before the election. It's not unlike what happened after the collapse of the failed economy in the Soviet Union. The corrupt and inept communist bosses who were tossed out of power ended up back on top by stealing their way into ownership positions in the economy's newly privatized companies. Similarly, delivering the exact opposite of "change," President-elect Barack Obama is putting some of the nation's most notorious foxes in charge of guarding the chicken coop by way of a proposed economic team that New York Times correspondent on national economic policy Jackie Calmes calls "a virtual Robert Rubin constellation."

Obama's "choices for his top economic advisers — Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director — are past protéegées of Mr. Rubin," explains Calmes, formerly the chief political correspondent for The Wall Street Journal's Washington bureau. Geithner, picked to succeed Treasury secretary Henry Paulson, was Robert Rubin's undersecretary for international affairs at Treasury, Orszag was a dependable Rubin ally during his years at Treasury, and Summers served as deputy Treasury secretary under Rubin. Robert Rubin, former Treasury secretary in the Clinton Administration and currently a key economic advisor to President-elect Barack Obama, has pocketed tens of millions of dollars from now twice bailed-out Citigroup.

As chairman of Citigroup's executive committee from 1999 until August 2008, Rubin played a key role in overseeing a period in which the bank was pushed to a point of near-collapse. The New York Times quotes "Citigroup insiders and analysts" as saying that Rubin played a "pivotal" role in producing the bank's current woes "by drafting and blessing a strategy that involved taking greater risks to expand its business and reap higher profits." Earlier, as Treasury secretary during the Clinton years, "Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities," reports the Times. "During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent."

And Summers? "Rubin, with Mr. Summers," reports the Times, "helped tear down the regulatory walls between banks, brokerages and insurance companies, and freed them to trade in unregulated and little-understood derivatives worth trillions of dollars." By the time it was all over, by the time all the slashing and dicing of exotic products was completed and all the toxic mortgages had been repackaged and sufficiently camouflaged, Citigroup's stock had lost 90 percent of its value, 75,000 jobs at the bank were lost, America's taxpayers were guaranteeing a total of $306 billion of the bank's pool of troubled assets against losses, and Robert Rubin had pocketed $115 million in pay from Citigroup for his nine years of poor planning and inadequate oversight.

Last January, Rubin, speaking as a Citigroup director, claimed that the growing problems in the financial sector were just "part of a cycle of periodic excess leading to periodic disruption." Rubin's remark "seemed glib given that the financial world looks very much ready to melt down," reported Fortune magazine's Katie Benner at the time. Citigroup had already written down more than $24 billion in losses. To the extent that there were any problems, Rubin, rather than blaming anyone on Wall Street, pointed to the need for a "more educated electorate" and more income redistribution.

On the latter point, on creating more "fairness" in the distribution of wealth and income, Rubin did more than his share at Citigroup, except in the opposite direction of what Obama is preaching, by pocketing $115 million while 75,000 people lost their jobs. On the night of June 3, after the last primaries, Barack Obama took his promise of "hope" and "change" to its highest level. "This was the moment," he declared, "when the rise of the oceans began to slow and our planet began to heal." How about if we just forget about the hot air and miracles and just try to hire someone for a "change" who isn't a crook?

Remember when Dick Cheney was pilloried for reportedly saying, earlier this decade, that "deficits don't matter"? We recall reading any number of press releases denouncing the Vice President for supporting tax cuts that contributed to short-term deficits but also helped the economy grow until the deficits shrank nearly away. Yet somehow none of those same voices are objecting now that the government is spending its way into deficits that are so large they dwarf any during peacetime in U.S. history. The Congressional Budget Office released its latest budget forecast yesterday, and we now really do have red ink as far as the eye can see.

Thanks to a 6.6% decline in revenues due to recession, a spending increase of some $500 billion or 19%, and assorted federal bailouts, the U.S. deficit for fiscal 2009 (ending September 30) will nearly triple to $1.19 trillion. That's 8.3% of GDP, which CBO says "will most likely shatter the previous post-World War II record high of 6.0 percent posted in 1983." It certainly blows away any deficit this decade, not to mention the Reagan years when smaller deficits were the media cause celebre. But there's more. None of that includes the new fiscal "stimulus" that President-elect Obama has promised to introduce upon taking office in two weeks. The details aren't known, but Mr. Obama and Democrats have been talking about at least $800 billion, and probably $1 trillion, in new spending or various tax credits and reductions over two years.

Toss that in and add more expected bailout cash, and if the economy stays slow the deficit could reach $1.8 trillion, or a gargantuan 12.5% of GDP. That 2006 Democratic vow to pass "pay as you go" budgets seems like a lifetime ago, which in political terms it was. We've long argued that deficits per se are not worth losing sleep over, though we do recall when Robert Rubin and Larry Summers claimed that reducing them was itself an economic virtue because it reduced interest rates. With their acquiescence in the magnitude of these deficits, we trust they will now admit to burying Rubinomics as a serious economic philosophy. Democrats are once again all Keynesians now -- at least until they want to use the deficits as an argument to raise taxes in a year or two.

As an economic matter, it does make sense to run deficits in a recession rather than to raise taxes in a way that would delay any recovery. Borrowing money to finance a war (Reagan's aircraft carriers in the 1980s) or to pay for tax cuts that promote growth (Reagan and Bush's tax cuts) is often money well spent. Had bipartisan Washington passed a big pro-growth tax cut a year ago, rather than settle in February for $165 billion in no-growth rebates and spending, the economy would be stronger and the deficit lower today. The economically crucial issue for the long term is how much the government spends, because that is what becomes a claim on current or future taxpayers. This is where the CBO forecast gets scary. Including the Obama stimulus spending and assuming the full $700 billion of bailout money for the banks, insurance companies, auto firms and so forth gets fully spent, federal outlays could approach $4 trillion in 2009. That's double the $2 trillion Congress spent only seven years ago.

Federal expenditures are now rapidly outpacing the growth of the economy, which is expected to be negative this year. CBO estimates that even before the stimulus federal spending will climb to an all-time high 24.9% of GDP, up from the previous post-World War II high of 23.5% in 1985. Add the stimulus and bailout cash and we estimate the federal spending share of GDP will climb to 27.5%. All of this is fast pushing the U.S. to European spending levels, and that's before Mr. Obama's new health-care entitlements. The problem with most of this spending is that it will be hard to stop once it becomes part of the annual CBO baseline. Congress never reduces spending year over year. While much of the $700 billion in Troubled Asset Relief Program money will probably be returned to the Treasury as banks redeem the government's preferred shares, Congress will want to turn around and spend that cash on other things unless the Obama Administration says no.

CBO also reports that some $240 billion of the new spending is for the bailout of Fannie Mae and Freddie Mac, which Congress will also want to keep in business as part of its nationalization of the mortgage market. So that $240 billion may never be repaid, though only last year our Solons and Treasury Secretary Hank Paulson were assuring us that Fan and Fred were no threat to taxpayers. Think of this as Congress having stolen from taxpayers as a result of its Fannie scam nearly five times what Bernard Madoff may have stolen from his clients. Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington -- and fast.

Ilargi: I don't want to waste too much of my space or your time on the jobless numbers released today. Just to say that November was revised down by 51.000 jobs to 584.000, and that as I said yesterday December was the month when many companies lived on by clinging to fantasies. Let's see what the January numbers look like, they will be a much better indicator.

The U.S. economy lost 524,000 jobs in December, closing out the worst year for job losses since World War II, the Labor Department said Friday.Nearly 2.6 million jobs were lost in 2008, with 1.9 million destroyed in just the past four months, according to a survey of work places. It's the biggest job loss in any calendar year since 1945, when 2.75 million jobs were lost as the wartime economy was demobilized. The unemployment rate rose to 7.2%, the highest in 16 years. Unemployment increased by 632,000 to 11.1 million, according to the survey of households. That same household survey showed employment falling by 806,000 in December. In 2008, the unemployment rate rose by 2.3 percentage points and unemployment increased by 3.6 million. The report was worse than expected, with payrolls in October and November revised lower by a total of 154,000 jobs. November's loss was revised to 584,000, the highest in 24 years.

Economists surveyed by MarketWatch expected payrolls to fall by 500,000 and the unemployment rate to rise to 7.1%. "Overall, a terrible report," concluded Ian Shepherdson, chief U.S. economist for High Frequency Economics. "The only possible glimmer of light is that the maximum rate of fall of payrolls is hopefully not far off." Total hours worked in the economy fell 1.1%, with the average workweek falling to the shortest ever. The number of people working part-time because of the slowing economy rose by 715,000 to 8.04 million. An alternative measure of unemployment that includes workers too discouraged to look for a job rose to 13.5% from 12.6% in November; it's the highest in the 13 years since those data have been kept.

Job losses were widespread. Only 25% of 274 industries were hiring in December. Goods-producing industries cut 251,000 jobs in December, including 149,000 in manufacturing. The factory workweek plunged below 40 hours to a record low 39.9 hours, and average overtime fell to just 3 hours. Of 84 manufacturing industries, just 11% were hiring. Services-producing industries cut 273,000 jobs in December, including 67,000 in retail trade and 113,000 in business services. Temporary-help jobs fell by 81,000. Health-care industries added 32,000 workers. Average hourly earnings increased by 5 cents, or 0.3%, to $18.36 an hour. Hourly pay rose 3.7% in 2008, outpacing the 0.6% increase in the consumer price index through November.

In tough times, politicians squabble. Out of this heat, light should emerge. Alas, it is not doing so, at least in the UK. The utterances of leading Labour and Conservative politicians do not explain how the UK economy is to emerge from its current quagmire. The UK has proved horrifyingly vulnerable to a financial crisis that has cut off funding from abroad. But why is it so vulnerable? The answer from David Cameron, the leader of the opposition, is simple: “We’re in this mess because of too much debt – too much government debt; too much corporate debt; too much personal debt; and it becomes clearer all the time that the scale of Britain’s debts puts us in a much weaker position than other countries.” The right answer, Mr Cameron suggests, is “an economy where government and its citizens live within their means, save for a rainy day, waste not and want not. It’s an economy where everyone has the chance to own their own home with space to live and breathe – and where we work to live, not live to work.”* So, in response to the biggest economic crisis since the 1930s, he has decided to take a pre-Keynesian view of the management of public finances.

Mr Cameron argues that the government should save for a rainy day. But he fails to note both that it did – public sector net debt was 36 per cent of gross domestic product at the end of 2007-08, down from 43 per cent in 1996-97 – and that no day could be much rainier than today. Mr Cameron argues, again, that everyone should own their own home. Yet it was this silly idea – coupled with controls on house building supported by his party and the liberalisation of finance it promoted – that formed the housing bubble and explosion of household debt. Mr Cameron argues for improving the tax treatment of savings. But an excessive private desire to save is now a huge danger. He also fails to note the already favourable treatment of home owners, savers for pensions and investors in “individual savings accounts”. He is pandering to current complaints about low returns.

But low returns are an alternative to debt deflation and mass bankruptcy, which would wipe out many financial assets. Mr Cameron continues to argue against the government’s decision to cut value-added-tax. But discretionary measures are forecast to cost only 1.1 per cent of GDP this financial year against the forecast of overall public sector net borrowing at 8 per cent of GDP. The question he ducks is whether the government should have tried to cut the fiscal deficit in the midst of a deep recession and, if so, by how much. Compared with this, the VAT cut was a mere bagatelle. Yet Mr Cameron is also right to argue that “any action that must be taken in the short term must be consistent with the long-term economic change that Britain needs”. This does not mean the government is wrong to act as borrower of last resort. But the weakness in the government’s position is indeed strategic.

From what Alistair Darling, chancellor of the exchequer, said in his interview with the Financial Times this week, it is not clear that its strategy consists of more than trying to get back to normal as soon as possible. If by “normal” one means the pre-2007 economy, that goal is both unobtainable and undesirable. The post-crisis economy must be utterly different from before. Mr Cameron at least understands this. What does this mean? It means a return to growth, despite lower levels of private borrowing, higher savings rates and a move to fiscal balance. If the government knows how to achieve this combination, it has not said so. So what are the required elements?

First, the economy will have to grow out of its over-indebtedness during many years. It is important to sustain the financial system, but crazy to expect a return to buoyant lending. Second, the current account will have to go into surplus, to generate activity without extra borrowing. Third, higher savings will also be needed. That is partly because output of tradeable goods is more capital intensive than that of services. Fourth, it makes sense to use a substantial portion of today’s massive government borrowing for investment, particularly in infrastructure. Such investment must make sense when the government can borrow cheaply. Fifth, the transition to an economy with higher exports is going to take years. The fall of sterling should help. But the economy will depend on large net inflows of capital for some years.

Finally, the government must indeed maintain fiscal and monetary credibility. If a return to inflation is widely feared, the game will be up for the UK. The danger is not only deflation, but also a sterling collapse, a jump in inflation expectations and a spike in long-term government bond rates. The Bank of England was right to cut interest rates modestly this time. What is needed now is a plan of escape into what should be a different economy. The opposition does have some notion of the need for such a strategic shift, but has a foolish response to the immediate crisis. The government now has a broadly sensible response to the crisis, but no strategic view. Each condemns the other for its failings. Meanwhile, the hapless UK economy flounders.

President-elect Barack Obama proposed on Thursday having the U.S. Federal Reserve buy municipal bonds to cut lofty borrowing costs for cash-strapped cities and states. The facility would be similar to a backstop program that helped thaw the commercial paper market, Obama said in an outline of his plan to revitalize the economy posted on his website. "This new facility should be designed to protect taxpayer resources while ensuring that state and local governments can continue to provide vital services to their residents," he said. The Regional Bond Dealers Association said the proposal recognizes the weakness in the municipal bond market brought about by the credit crisis and recession, and can help states and localities finance their operations.

For the last year, the credit crisis has shaken the muni market, chipping away at investor confidence and hurting issuers' ability to raise needed funds. Investors have fled tax-free munis and sent yields to historic highs following the freeze of the auction-rate market, downgrades of muni insurers and the loss of huge liquidity providers such as Bear Stearns & Co. In addition, the sputtering economy has cut tax revenues for states and cities. As many as 41 U.S. states and the District of Columbia are grappling with budget deficits in the current fiscal year, according to the Center on Budget and Policy Priorities, a nonpartisan think-tank. California, for example, faces a $42 billion deficit through fiscal 2010, and is warning that it may run out of cash by February and be forced to issue IOUs in lieu of salaries to public sector workers. "Small businesses and state and local governments are having serious difficulty obtaining necessary financing from debt markets," Obama said.

He proposed basing the municipal bond facility on the Fed program to buy commercial paper. The Fed's substantial purchases of commercial paper have almost single-handedly propped up the market for short-term corporate borrowing. Investors welcomed the proposal as a first step toward supporting the market. It signals a federal willingness to consider aiding local governments and is helping revive investor confidence in municipals, according to Dominick Mondi, senior managing director at Mesirow Financial Inc in Chicago. "It just shows that the Fed and the Treasury are not going to ignore it," Mondi said. "There are budget deficits they are facing and they need to be able to finance. If the states and locals need a bridge, I personally think that's marvelous." Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer, agreed. "It's heartening that we're starting to see a recognition on the part of the federal government, particularly the president-elect, that municipal government issuers have not been operating in some parallel economy and have been hurt along with taxpayers," Dresslar said.

Outgoing Washington State Treasurer Mike Murphy said a federal backstop is an "interesting" idea although he had some concerns. "I'm not real clear who they would be guaranteeing. ... If the Feds were to get involved in this business then would there be another layer of regulation?" he asked. Nevada State Treasurer Kate Marshall said, "Liquidity in the market is still an issue and anything he can do to loosen that joint is a good thing ... But I think there are some questions still as to how it would work." States have repeatedly called for government aid but have so far been left out of the bailout that benefited the financial and auto industries. Lawmakers in the U.S. House of Representatives on Wednesday pledged that they would include assistance for state and local government in the economic stimulus bill planned by the new administration.

President-elect Barack Obama has little time to decide the fate of Fannie Mae and Freddie Mac as bank regulators warn of the drag the government-seized mortgage- finance companies are having on the U.S. economy. Federal regulators are concerned that if the new Obama administration doesn’t act quickly enough it may miss the opportunity to resolve the ambiguous government backing of Fannie and Freddie, an arrangement that has scared away many foreign investors the companies rely on to fund new loans.

Throwing the full faith and credit of the U.S. behind Fannie and Freddie may almost double the $5.8 trillion in federal debt, pushing Treasury rates higher, raising the government’s borrowing costs, and boosting inflation. Regulators may be ready to pay that price, with some pushing for an explicit guarantee for the companies and others seeing the need for nationalization. By allowing "structural ambiguities to persist for too long, U.S. policy makers have created an untenable situation," Treasury Secretary Henry Paulson told the Washington Economic Club yesterday.

Paulson, in one of his last public addresses before leaving office, joined Federal Reserve Chairman Ben S. Bernanke in stating a need for a permanent government role in mortgage financing. Neither has said definitively what role Fannie and Freddie should have, though Paulson suggested replacing the companies with utility-like businesses that would guarantee mortgages without maintaining investment portfolios. "A public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain," Paulson said in his speech yesterday.

Washington-based Fannie and McLean, Virginia-based Freddie are the largest U.S. mortgage-finance companies, owning or guaranteeing more than 40 percent of the $12 trillion in U.S. residential mortgage debt. The companies have $4.2 trillion in home-loan securities and $1.7 trillion in unsecured corporate bonds outstanding, according to data compiled by Bloomberg. Paulson and Federal Housing Finance Agency Director James Lockhart placed Fannie and Freddie in a government-operated conservatorship on Sept. 6 after their losses threatened to further disrupt the housing market. The U.S. agreed to inject as much as $200 billion of capital to keep the companies solvent.

Since then the Fed, in an effort to lower mortgage rates, committed to buy as much as $100 billion of the companies’ debt and $500 billion of their mortgage bonds. That’s on top of a $700 billion rescue package for the financial services industry and other programs to help automakers and spur consumer lending. "Today, Fannie Mae and Freddie Mac are in a temporary form that, while stable, cannot efficiently serve their Congressionally chartered mission and protect the taxpayers’ investment over the long-term," Paulson said yesterday. "We took the right actions to meet a specific need at a specific time."

Standard & Poor’s said Sept. 2 that a significant and swift increase in the U.S. debt burden, including costs to save Fannie and Freddie, could threaten the government’s AAA credit rating. While the likelihood of a downgrade is low, the glut of public spending may eventually erode the government’s top-tier credit status if policy makers can’t bring the deficit under control by 2011, said Steve Hess, the lead U.S. government debt analyst at Moody’s Investors Service in New York. "The current credit crisis, plus the recession, plus the stimulus package that’s coming up, put them all together and you’re going to see a considerable deterioration with the U.S. balance sheet," Hess said, estimating the budget deficit will be $1 trillion this fiscal year and close to that much next year.

The Congressional Budget Office said the deficit will more than double this year to at least $1.18 trillion, driven up by the federal bailouts. Next year’s shortfall will reach at least $703 billion, the nonpartisan agency said in a biannual report yesterday. Those estimates don’t include the cost of Obama’s pending economic stimulus package, which may add about $775 billion to the total. The president-elect, who takes office on Jan. 20, proposed a two-year stimulus proposal in a speech today that includes infrastructure spending aimed at creating or saving 3 million jobs and about $300 billion in tax cuts for individuals and businesses. The Bush administration decided not to count Fannie and Freddie’s liabilities as obligations in its budget estimates.

Former Congressional Budget Office Director Peter Orszag, Obama’s pick to head the White House budget office, in September advocated adding the debt to the balance sheet. Though much of the companies’ unsecured debt is likely to be counted, Orszag said at a Sept. 9 press briefing that their mortgage securities won’t necessarily translate into the same amount of federal debt because loans and other assets back those liabilities. Though the accounting change may hurt Treasuries, federal borrowing costs ended last year near record lows.

Two-year notes dropped to 0.6044 percent on Dec. 17, while the benchmark 10- year note touched an all-time low of 2.0352 percent on Dec. 18. Yields on 10-year notes rose yesterday two basis points, or 0.02 percentage point, to 2.48 percent, according to BGCantor Market Data. Two-year yields rose four basis points to 0.80 percent. "The federal government has to make up its mind by the middle of this year as to what the final outcome will be for Fannie and Freddie," said Ira Jersey, a U.S. interest rate strategist at Credit Suisse. "Because the closer they get to the end of the year, there’s going to be more of an issue of whether they can roll over their debt."

In a report scheduled to be released Friday, the Congressional panel overseeing the $700 billion federal bailout has expressed growing concern about the effectiveness and execution of the rescue plan. A draft of the report obtained by The New York Times criticized the Treasury Department for its "shifting explanations" about the underlying purpose of the bailout, its failure to answer many of the panel’s questions and its failure to require financial institutions receiving bailout money to fully account for how they are using the public’s money.

"The recent refusal of certain private financial institutions to provide any accounting of how they are using taxpayer money undermines public confidence," the draft of the report said. "For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore," it said. The 45-page report also asserted that the Treasury, in defiance of what the panel claimed was Congress’s clear intent when it passed the bailout bill in October, had taken "no steps to use any of this money to alleviate the foreclosure crisis."

The Treasury declined to comment on the panel’s latest findings, with the bailout, known as the Troubled Asset Relief Program, or TARP. "We can’t comment on a report that’s not been shared with us," said Brookly McLaughlin, a spokeswoman for the Treasury. But in testimony to Congress and elsewhere, Neel T. Kashkari, the Treasury official overseeing the bailout, has repeatedly asserted that the rescue plan is in fact working as intended. While cautioning that its full effect will take time to register, he has argued that the rescue plan has already begun to reduce foreclosures while also providing crucial stability and liquidity to the financial system.

"The most important evidence that our strategy is working is that Treasury’s actions, in combination with other actions, stemmed a series of financial institution failures," Mr. Kashkari wrote last week in a letter to the Congressional oversight panel. According to a running tally by The Times, the Treasury has already committed $359 billion of the $700 billion to banks, credit card companies, automakers and insurance companies, among others. The oversight panel’s latest assessments are likely to fuel the debate over how to spend the remainder of the bailout money.

Yet they also come as members of Congress are discussing how to fashion a huge new stimulus bill that President-elect Barack Obama has said he hopes to sign soon after Inauguration Day, Jan. 20. Officials from the Obama transition team have said that the cost of the stimulus package could well exceed the $700 billion bailout. The Congressional oversight panel has three Democratic appointees and two Republican appointees. It is led by Elizabeth Warren, a Harvard law professor and an expert on bankruptcy and credit card issues. A spokesman for the panel declined to comment on the draft report.

The preliminary report raises new questions about the single biggest component of the bailout, the Capital Purchase Program, under which the government has invested tax dollars into scores of banks it judges to be healthy. According to the Treasury, the government has injected $177.5 billion in bailout money into 214 financial institutions in 40 states and Puerto Rico, as of Dec. 31. The report, though, questioned whether the Treasury could accurately assess the health of these banks, especially given the collapses of several banks that were once deemed to be healthy by federal regulators.

Ilargi: TARP and other bail-outs, alongside the innovative financial instruments that provoked them, will go down in history as the greatest criminal fraud against American citizens in history. But Congress had already absolved Paulson and his crew from any and all responsibility, even before a penny was spent. And that is not just against the law, it is unconstitutional. So you tell me who's to blame. The fraudsters are smart, and they have the power to change the rules of the game on the fly. And who controls Congress again? I've often and at length talked about the legitimacy and the legal status of a government that ruins its economy, and said that we are not facing an economic crisis, but a political one. And if you would claim it's a constitutional crisis, I wouldn't deny it. Here's hoping people start recognizing that before it all blows up in their faces.

Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc. The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.

Paulson’s warrant deals may give U.S. taxpayers, who are funding the bailouts, less profit from any recovery in financial stocks than shareholders such as Goldman Sachs Chief Executive Officer Lloyd Blankfein and Saudi Arabian Prince Alwaleed bin Talal, owner of 4 percent of Citigroup Inc., said Simon Johnson, former chief economist for the International Monetary Fund. The transactions are "just egregious," said Johnson, a fellow at the Peterson Institute for International Economics in Washington. "You want to do it the way Warren does it." Paulson’s decisions mark the first time in the nation’s 236- year history that the U.S. government has had to prop up the financial system by purchasing shares in institutions from Goldman Sachs, the most profitable Wall Street firm last year, to Saigon National Bank, a Westminster, California, lender with a market value of $3.8 million.

"Paulson said he had to make it attractive to banks, which is code for ‘I’m going to give money away," said Joseph Stiglitz, who won a Nobel Prize in 2001 for his work on the economic value of information. "The worst aspect of this is that they were designed not to do what they were supposed to do," he said in a telephone interview from Paris Jan. 7. "In many ways, it’s not only a giveaway, but a giveaway that was designed not to work."

The Treasury would have held warrants for 116 million shares of Goldman Sachs under Buffett’s terms, which would be equivalent to a 21 percent stake when added to those currently outstanding. Instead, the dilution is 2.7 percent under the Treasury plan. Blankfein is the company’s biggest individual investor, with 2.08 million shares worth about $178 million today, according to Bloomberg data. His 0.47 percent interest would have declined to 0.36 percent under Buffett’s terms and would be 0.44 percent if the Treasury’s warrants were exercised. Treasury spokeswoman Brookly McLaughlin wouldn’t say how the bailout conditions were set. "Obviously, the government is going to have different objectives than a private investor," McLaughlin said in an e- mail. "The main idea was not to turn a profit on Day One, but to provide stabilizing capital."

Senator Judd Gregg, a New Hampshire Republican, estimated in a Jan. 4 Wall Street Journal opinion article that TARP investments have earned about $8 billion while recapitalizing the banking system. Government agencies have committed more than $8.5 trillion to shoring up the financial system, including the $700 billion Troubled Asset Relief Program signed into law Oct. 3 by President George W. Bush. TARP was originally sold to Congress as a way to buy securities that had fallen in market value. Paulson shifted his emphasis to direct capital injections to banks to prevent the financial sector from foundering. The House Financial Services Committee and TARP Congressional Oversight Panel plan hearings on how federal bailout money will be used during the administration of President-elect Barack Obama. The financial services panel scheduled its meeting for Jan. 13.

"We believe the public has a right to know the value of the investments being made with the TARP funds and whether the terms Treasury receives for investing taxpayer dollars are as good as those that private individuals like Warren Buffett receive for similar investments," said Elizabeth Warren, chairwoman of the TARP Congressional Oversight Panel, in an e-mail. "This is a question we will continue to ask until we get a complete answer." Stiglitz said finance professionals at Treasury possessed expertise on warrant pricing that members of Congress didn’t. As a result, Paulson gave lip service to the lawmakers’ intent on TARP without gaining much value for taxpayers, said Stiglitz, a Columbia University professor who described the pricing mechanism as "a gimmick to make sure that they were giving away something worth nothing."

"If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired," he said. A $5 billion U.S. loan last week to GMAC LLC, the Detroit- based finance affiliate of General Motors Corp., was made under the Treasury program and was part of $6 billion advanced to keep the automaker afloat. In advancing the $5 billion, Paulson accepted warrants that reward taxpayers with an additional $250 million, or 5 percent of the stake. That compares with 15 percent on the 174 completed bank rescues as well as the 100 percent Berkshire Hathaway Inc. Chairman Buffett obtained on an investment in Goldman Sachs in September, Bloomberg data show. A warrant is a company-issued certificate that represents an option to buy a certain number of shares at a specific price by a predetermined date.

"You’d certainly hope that the trend would be in the other direction, for stronger terms," said Rep. Scott Garrett, a New Jersey Republican on the House Financial Services panel, in a telephone interview Dec. 26. "I don’t buy the methodology that they have to be circumspect to protect the parties involved. Ultimately their position has to be to protect the American taxpayer." While the government has pledged to recover its investments, Congress provided little guidance on how to accomplish that. Legislation mandated that the Treasury receive warrants to acquire shares in companies tapping the program to potentially reward taxpayers. The law didn’t specify how many warrants or how they should be priced, factors that will determine how much money, if any, taxpayers get in exchange for their risk.

The government has received warrants valued at $13.8 billion in the 25 biggest capital injections from TARP, according to Bloomberg data. Under the terms Buffett negotiated for his $5 billion stake in Goldman Sachs, the TARP certificates would have been worth $130.8 billion. Buffett received 43.5 million Goldman Sachs warrants valued at $82.18 apiece on the date of the transaction, or $3.6 billion, Bloomberg analytics show. Paulson, who served as the New York- based bank’s chief executive officer until 2006, injected twice as much taxpayer money into Goldman Sachs a month later and got 12.2 million warrants worth $72.33 each, or $882 million.

If the Treasury had received the same terms as Buffett, taxpayers would have become the biggest investors in most of the bailed-out banks and existing stakes would have been diluted, Bloomberg data show. "I halfway believed that the taxpayers would make money in September, but I really don’t believe it now," Rep. Brad Miller, a North Carolina Democrat on the House Financial Services committee, said in a telephone interview last month. "We have to have confidence in Treasury to run the program in a way that protects taxpayers, and there’s very little in the way they’ve run it that inspires confidence," he said.

Congress left it to Paulson and his staff to decide how warrants would be priced and how many the U.S. would receive under the TARP, according to Caleb Weaver, a spokesman for the program’s oversight board. Treasury imposed identical terms for 140 capital injections. Thirty-four closely held lenders issued certificates to the government for preferred stock instead of common shares and one community development institution wasn’t required to issue warrants, according to the Jan. 6 Treasury report on TARP. Bailouts for American International Group Inc., GMAC, GM and the second of two infusions into Citigroup were reported separately in the Treasury statistics.

Paulson and former Goldman Sachs banker Neel Kashkari, who runs TARP as the interim assistant secretary of the Treasury for financial stability, have said the bank bailout will pay off. "We’re not day traders, and we’re not looking for a return tomorrow," Kashkari told a Mortgage Bankers Association conference on Dec. 5 in Washington. "We are looking to try to stabilize the financial system, get credit flowing again, and over time, we believe that the taxpayers will be protected and have a return on their investment." Jackie Wilson, a spokeswoman for Omaha, Nebraska-based Berkshire Hathaway, didn’t respond to e-mail and telephone messages seeking comment. Goldman Sachs spokesman Michael DuVally declined to comment, as did Citigroup spokesman Michael Hanretta.

Paulson left money on the table in three ways, according to economist Johnson: accepting fewer warrants than Buffett did; setting the certificates’ price trigger, or strike, above market values; and receiving an annual yield on the preferred shares that is half of what Buffett will get for the first five years. The government will forgo almost $48 billion over the next five years in preferred stock dividend payments from the 25 biggest TARP infusions, as compared with Buffett, according to the terms of the deals. Buffett’s five-year warrants for 43.5 million shares of Goldman Sachs were valued at $82.18 each using the Black-Scholes option pricing model developed by Fischer Black and Myron Scholes to estimate the fair market value of such contracts. The model uses, among other data, the implied price volatility of the underlying security. The Treasury received 10-year warrants for 12.2 million Goldman shares priced at $72.33 on Oct. 28 using the same method.

The taxpayers’ certificates were set at the 20-day trailing average of the share price, which for Goldman Sachs was $122.90 on Oct. 28, when the company closed almost $30 cheaper at $93.57. The trailing average ensured a higher strike price, and lower value for the warrants, because bank stocks were plummeting. By contrast, Buffett received an 8 percent discount to the market price at $115 a share on Sept. 23, when the stock closed at $125.05. Taxpayers also acquired preferred shares as part of the bailout. These securities, which can’t vote unless the issue at hand is the creation of a more senior preferred stake, carry an interest payment of 5 percent that increases to 9 percent in five years. Buffett’s preferred shares in Goldman Sachs pay a 10 percent yield.

If Goldman Sachs rises to its five-year average price of $147, Buffett will be able to profit by $1.4 billion from exercising his warrants. The government warrants will be in the money for $294 million, or about a fifth as much for twice the investment. TARP was set up to recapitalize banks and other financial institutions that lost money on subprime mortgages and commercial lending. It allocated $125 billion to nine of the largest banks and securities firms, and then invited all banks or savings and loans to apply for part of another $125 billion. Recipients range from JPMorgan Chase & Co. in New York, which got $25 billion, to Saigon National, which received $1.2 million.

The government plans billions more in cash injections to companies including credit-card networks Discover Financial Services and American Express Co. Under Buffett’s terms, the Treasury’s investment in Citigroup would also have brought greater potential for profit to taxpayers. The two cash infusions totaling $45 billion would have resulted in warrants for about 5.6 billion shares, which would more than double the 5.4 billion of existing shares. The Treasury’s warrants call for 464 million shares, or 8 percent of the number under Buffett’s terms.

None of the bank warrants for the biggest 25 capital injections from TARP funds can be exercised profitably now. Goldman Sachs closed in New York Stock Exchange composite trading at $85.41 yesterday, 31 percent below its $122.90 strike price. Citigroup closed at $7.16, 60 percent below its highest exercise price of $17.85. Four of the 25 bank warrants could be exercised in the next year, based on Bloomberg surveys of analysts’ 12-month share- price forecasts. The average projection for Morgan Stanley at $26.46 is more than $3 higher than its strike price. Analysts also expect American Express Co., Bank of New York- Mellon Corp. and the second capital injection for SunTrust Banks Inc. to rise above their strike prices, according to the surveys. Congress may have another chance to get money back. The TARP legislation includes a requirement that lawmakers find a way in five years for taxpayer losses to be recouped from the financial industry.

Which banks get saved and which are left to die? Few know the answer, and the Treasury Department continues to send mixed signals on how it is implementing the Troubled Asset Recovery Plan (TARP). Under the plan, Treasury has pledged $162 billion to 208 financial institutions. Not all of them are either billion-dollar giants or institutions that obviously measure up to Treasury's own standard of "healthy banks." Consider the case of OneUnited, a small Boston bank that was recently the subject of a federal enforcement action that questioned the bank's safety and soundness -- and was also the recipient of a $12 million TARP bailout. In October, OneUnited agreed to a so-called cease-and-desist order issued by its regulators, the commonwealth of Massachusetts and the Federal Deposit Insurance Corp.

The allegations against the bank included "operating without effective underwriting standards and practices," "operating without an effective loan documentation program" and "engaging in speculative investment practices." The action also alleged excessive executive compensation. The FDIC ordered OneUnited to "sell all bank-owned automobiles," and to require that executives reimburse the company for any vehicles that had been purchased. The Boston Business Journal reported in November that the bank owns a 2008 Porsche sport-utility vehicle that is registered at the address of OneUnited CEO Kevin Cohee. The FDIC also ordered the bank to stop paying for a beachfront house in Santa Monica that, according to the Boston Business Journal, was purchased for more than $6 million in early 2007 by a group that included Cohee and his wife Teri Williams, the bank's president.

OneUnited settled the case without admitting or denying the findings, and agreed to undertake a program to fix its shortcomings. The bank, which bills itself as the first black-owned Internet bank and carries the Community Development Financial Institution designation that Treasury awards to institutions serving low-income residents, said it is cutting costs and making other changes in response to the FDIC order. OneUnited, in response to questions from Fortune and CNNMoney.com, said it was hit hard by a loss this fall on its holdings of preferred stock in Fannie Mae and Freddie Mac, and that the Treasury infusion would help it to restore its capital. "We were a casualty, not unlike many banks, of the tsunami that devastated the entire industry," said OneUnited senior counsel Robert Patrick Cooper, who says the Treasury knew of the enforcement action when it approved the bank's TARP application. "With the TARP money, we look to continue our mission and increase our lending and investments." The Treasury Department didn't comment for this story.

Regulators issue cease-and-desist orders to banks believed to be engaged in unsafe or unsound practices. An FDIC spokesman describes the orders as "not uncommon," though the agency issued only eight in November, the latest month for which data are available. None of those institutions have received TARP funds. The FDIC counted 8,571 member institutions as of Sept. 30, 2007. The decision to direct taxpayer funds to a bank that recently faced official questions about its safety and soundness adds to questions about how TARP recipients are being chosen. Treasury said in its response to a congressional oversight panel that the program "is designed for healthy banks." Under the TARP capital plan, banks seeking funds may apply with their main federal regulator, which vets the application and, where appropriate, passes it along to the Treasury. But Treasury has hardly been transparent.

"How they decide who gets the money and who doesn't is a mystery to me," said Hal Reichwald, a partner at law firm Manatt Phelps & Phillips in Los Angeles. "Qualitative judgments about financial institutions are being made at the Treasury, but we have no idea what the standards are." This past fall, for instance, the government told Cleveland-based National City that it wouldn't receive support via the TARP - even though National City looked just as healthy, going by its capital ratios and other metrics, as several peers that received government funds. The decision, which led to National City's sale in October to Pittsburgh-based PNC, has had observers wondering whether the agency is quietly pursuing a plan to consolidate the industry into the hands of institutions it considers strong - without sharing how it arrives at that assessment.

The OneUnited bailout particularly irks one persistent critic of that bank's lending practices. "Whatever happened to helping the safe-and-sound banks?" asks Ken Thomas, an independent banking consultant in Miami and an author of a book on the Community Reinvestment Act, the 1977 law that encourages banks to lend in lower-income areas. Thomas notes that OneUnited has twice gotten the lowest rating on the FDIC's evaluation of its Community Reinvestment Act obligations in its Florida market, though its overall CRA rating has been satisfactory. "This [enforcement] action makes serious charges about the oversight" of the bank's management and board, Thomas added. "Yet they're getting taxpayer money?"

Not everyone is surprised by the news that a bank that recently faced a cease-and-desist order is getting TARP funds, however. William Galston, a senior fellow in governance studies at the Brookings Institution in Washington, said some question marks are inevitable, given the massive effort being made to stabilize and recapitalize the banking system. "We need to be realistic here," said Galston. "Mistakes are going to be made when you are undertaking a program of this size in the middle of a crisis. I don't take incidents like this very seriously." The bigger issue is that by lavishing taxpayer funds on banks with few strings attached, Congress and the administration "are asking for a lot from the people at a time when they don't trust the government," Galston added. "Now we're paying the price in terms of public perception."

Confronted with intense skepticism on Capitol Hill over the $700 billion financial rescue program, Treasury Secretary nominee Timothy F. Geithner and President-elect Barack Obama's economic team are urgently overhauling the embattled initiative and broadening its scope well beyond Wall Street, sources familiar with the discussions said. Geithner has been working night and day on the eighth floor of the transition team office in downtown Washington with Lawrence H. Summers and other senior economic advisers to hash out a new approach that would expand the program's aid to municipalities, small businesses, homeowners and other consumers. With lawmakers stewing over how Bush administration officials spent the first $350 billion, Geithner has little chance of winning congressional approval for the second half without retooling the program, the sources added.

That challenge is underscored by a report from a congressional oversight panel scheduled to be released today that hammers the outgoing Treasury Department for its handling of the financial rescue, including "what appear to be significant gaps in Treasury's monitoring of the use of taxpayer money." The report, moreover, faults the Treasury for failing to properly measure the success of the program or establish an overall strategy and skewers the department for not using any of the funds on foreclosure relief as Congress had directed. Much of the work by Obama's team has focused on establishing principles that would clearly define the program's course and the conditions of government aid to financial firms.

With Geithner leading the discussions along with Summers, who will head the National Economic Council in the White House, the group is devising plans that would use rescue funds to help homeowners avoid foreclosure and unclog the credit markets that finance loans to consumers, small businesses and municipalities. The team is also planning to have the government take more stakes in financial firms, but companies receiving federal aid would have to submit to greater restrictions on executive compensation than were imposed by the Bush administration. Geithner is also considering creating a new bureau within the Treasury to manage the Troubled Asset Relief Program, or TARP, in an attempt to improve the program's operations and oversight.

The group has come to believe the program needs a fresh start after determining the Bush administration succeeded in providing a measure of stability for the financial system but failed to jump-start bank lending or stem foreclosures, three sources said, speaking on condition of anonymity because no announcement has been made. Although the timing has not been settled, one source said details of this new approach may be laid out before Geithner's confirmation hearing, which is likely to be held late next week. Some lawmakers are not waiting for the transition team to release its plans. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, was set to announce legislation today that would force the Treasury to meet conditions if it requested the second $350 billion of the rescue funds. Frank's terms include many of the proposals Geithner is considering as well as several others such as restricting executive bonuses and requiring firms that receive federal aid to explain how they are spending the money. Frank has scheduled a Jan. 13 hearing on the future of the rescue program.

Yesterday, Senate Democrats took their own action to help homeowners whose mortgages are larger than the value of their house, announcing a deal with Citigroup that would allow bankruptcy judges to set new repayment terms for mortgage holders. Even if Geithner provided additional help for homeowners, he must overcome discontent among rank-and-file lawmakers about the program. Geithner faces a tremendous risk in asking for the money because if the request is turned down, it could wreak havoc in financial markets. But he cannot wait long to ask for more funds. In December, the Bush administration made $4 billion of its $13.4 billion loan to General Motors contingent on whether Congress approves the second half of the TARP funds. GM needs the money to meet a massive debt obligation due in mid-February.

Obama's top officials have begun discussions with key lawmakers on the TARP changes, but no decision has been made on when they will ask Congress for the balance of the rescue funds. It is possible that the request could occur before Obama's inauguration. In which case, Paulson, not Geithner, would ask for the money. Paulson in an interview this week said he would fully cooperate with Obama's team. In building a case for the additional $350 billion, however, Geithner must also allay concerns about his past responses to the financial crisis. Geithner, as president of the Federal Reserve Bank of New York, was a leading architect of the bailouts of Bear Stearns, American International Group and Citigroup. Some lawmakers plan to press him during his confirmation hearing to justify his role at those critical moments of the crisis and on what he plans to do to improve the financial system bailout. Others added that Geithner will have to explain how he would track how recipients of TARP money are spending taxpayer dollars.

The confirmation hearing in the Senate "will be one of the most important that the Finance Committee holds this year," said Sen. Max Baucus (D-Mont.), chairman of the panel. "In the meetings leading up to this hearing, I've been encouraged by the early plans for TARP that Mr. Geithner and other folks on the Obama economic team have outlined. There's no time to waste in righting the ship." A date for Geithner's confirmation hearing has not been set. But two congressional sources said they expect it will take place Jan. 15. Several lawmakers on Capitol Hill said they are still angry over the TARP program because it used $350 billion and was largely unsuccessful in unfreezing lending markets. Some banks that took government money continued to pay huge bonuses to executives and dividends to shareholders. Democrats expressed disappointment that the Bush administration did not use rescue money to help homeowners facing foreclosure.

But advocates of the program, including Paulson, said that the financial system would be much worse without the bailout. "It's been an essential tool and authority to prevent the collapse of the financial system. And I've been very clear that the second part will need to be taken down and that it's vital to our financial security," Paulson said. He added that Geithner "enjoys the confidence of Congress and the markets, and he understands these issues as well as anyone and he understands the TARP in great detail, so he's very well positioned to take this effort forward."

Consumer borrowing dropped by a record $7.9 billion in November as Americans scrambled to boost savings in face of the deepening recession and amid an investor exodus from securities backed by credit-card and other loans. The slump brought consumer credit down to $2.57 trillion, and capped the first back-to-back monthly decline since 1992, the Federal Reserve said today in Washington. The biggest decrease came in securitized assets, an area where Fed policy makers are creating a new $200 billion lending program to shore up credit. Today’s figures foreshadow a prolonged drop in consumer spending as households try to reduce debt with their net worth declining and job losses accelerating, analysts said.

"Consumers have clammed up," said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who forecast a decline. "The reduction in consumer credit doesn’t stop here, and will spill over into 2009. Households are bolstering their balance sheets." The Fed’s figures don’t cover borrowing secured by real estate. In October, credit fell by $2.8 billion, previously reported as a drop of $3.5 billion. Economists had forecast credit would be little changed, according to the median of 28 estimates in a survey conducted by Bloomberg News. Projections ranged from a gain of $6.9 billion to a decline of $5 billion.

A report from the Labor Department showed the number of Americans collecting unemployment benefits surged to 4.6 million two weeks ago, a 26-year high, as the labor market worsened. Initial jobless claims, which have been plagued by efforts to adjust the figures for the holidays, unexpectedly fell by 24,000 to 467,000 in the week that ended Jan. 3, the lowest level in almost three months. Total consumer borrowing fell at a 3.7 percent annual rate in November, the biggest percentage decline since January 1998, the Fed said today. The decline in dollar terms was the biggest since records began in 1943. Revolving debt such as credit cards decreased by $2.8 billion. Non-revolving debt, including auto loans, dropped $5.2 billion for the month.

Fed policy makers last month cut the benchmark interest rate target to as low as zero for the first time to prevent the recession from worsening. They also are taking steps to ease the flow of credit and reduce borrowing costs. "Credit conditions continued to tighten for both households and businesses, and ongoing declines in equity prices further reduced household wealth," according to minutes of the Fed’s December meeting. Policy makers also "expected economic activity to contract sharply in the fourth quarter of 2008 and in early 2009." The drop in wealth and lack of credit are forcing consumers to cut back. Wal-Mart Stores Inc., Macy’s Inc. and Gap Inc. slashed earnings forecasts after the worst holiday-shopping season in at least four decades, industry figures showed today.

Automakers are also struggling. Car sales fell 36 percent in December, capping the industry’s worst year since 1992. General Motors Corp. and Chrysler LLC, which got emergency federal loans to help stay in business, this month broadened incentive programs to boost sales. Credit-card companies, facing rising defaults, are taking steps to get government funds and retail deposits. Discover Financial Services in December won approval to become a bank holding company, and rival American Express Co. also is converting into a bank, allowing it to obtain capital under the Treasury’s bailout plan. The rate of delinquencies on indirect auto loans, which are made through third parties such as car dealerships, reached a record 3.25 percent in the third quarter, the American Bankers Association reported yesterday. Late payments on eight different types of loans, including auto lending and personal loans, rose 8 percent from the previous quarter to a 29-year high, the group said.

Think of Nixon going to China if you want to gauge the scale of Citigroup's about-face on mortgage bankruptcy. Citi is backing legislation in Washington to allow judges to change the terms of mortgages, like slash outstanding principal, for those who file for bankruptcy. Currently, courts can't amend the terms of first-home mortgages, and banks have fought to keep it that way.

Mortgages are secured loans. Banks have argued that changes weakening the legal link between the loan and the underlying property would increase lending risks, potentially driving rates higher. They also say a change could act as an incentive to borrowers to file for bankruptcy, leading to higher credit losses. The opposing view is that banks have been too slow to cut the principal on mortgages as part of workout programs. Instead, they have tried cutting monthly payments and left borrowers with mortgages worth far more than their homes.

It is instructive that Citi broke from the pack. Unlike peers, the bank has received two government bailouts, totaling $52 billion. And it also benefits from a loss-sharing agreement that caps losses on $306 billion of loans and securities. Skeptics suggest that if the bankruptcy change leads to higher credit losses, Citi could avoid the worst of it because of the loss-sharing agreement. Holdout banks may try to secure similar loss-sharing deals in return for falling in line with Citi, although there is no guarantee they would get that. If they did, they also might end up with another slug of preference shares that eat into profits for common shareholders and potentially increase government influence.

Citi, for example, has issued government preference shares worth more than its market value. That level of government presence could be one reason why Citi appears to have caved. But it also might have seen the writing on the wall. With policy makers lining up behind the bill, it looks likely to happen. There are some bones for banks. The legislation, authored by Illinois Sen. Dick Durbin, will apply only to mortgages made before enactment, although bankers should assume it will be repeated if there is another foreclosure crisis.

There also is language saying borrowers can get mortgage modification in bankruptcy only if they already have tried to renegotiate with lenders, who will be under pressure to strike a deal rather than leave it to a judge. The legislation is risky for banks because it messes with fundamentals of secured lending and is a blunt instrument. But it could help break the logjam in forcing modifications for loans in securitized pools. And with the threat of hefty new mortgage hits from the proposed legislation hanging over already-battered institutions, the administration might well be persuaded to soften the blow for banks.

“Dividends don’t lie.” Chalk up the death of another Wall Street cliché. In the late bull market, dividend payments provided one of the seemingly strongest arguments for the bulls. Maybe earnings numbers could be manipulated, but dividend payments required cash. If the company had the cash to hand out, you could be confident the earnings were real. It was a lie.

It is now becoming clear that the great news on the dividend front from 2004 through 2006 was not an indication of solid corporate performance; it was just another sign of lax lending standards. Lenders who willingly handed out money to homeowners with bad credit were even more generous to corporate borrowers.Now the situation has reversed. The quarter just ended had the worst dividend news for American companies in half a century, and this quarter could be even worse. Many corporate boards review annual performance and decide what to do about the dividend during the first two months of each year, and it is not likely to be a happy time. Until those meetings are completed, buying stocks for their high dividend yields may be risky.

“Investors need to be careful of overly generous yields,” said Howard Silverblatt of Standard & Poor’s, pointing to the possibility that more cuts will soon be announced. In the final three months of 2008, S.& P. counted 288 announcements by public American companies of dividend reductions or eliminations, in contrast to 239 companies that either initiated or raised their payouts. It was the first time since 1958 that there were more negative announcements than positive ones.In the boom years of 2004 through 2006, there were fewer than 100 negative announcements each year — the three best years in that regard since S.& P. started collecting data in 1955.

Companies appeared to be flush with cash during those days, but some of that was a mirage stemming from optimistic accounting, particularly at banks. In other cases, the cash was real but it did not stay in corporate treasuries very long. Wall Street was preaching the doctrine of shareholder value, and corporate America bought shares back at an unprecedented rate. From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.& P. 500 — generally the largest companies in the country — reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares. As a group, shareholders were paid about $200 billion more than their companies earned over that four-year period. Suffering investors who held onto their shares during the 2008 plunge may want to reflect on the fact that investors who were dumping shares got roughly twice as much of the money as the loyal holders did.

It was not only public companies that were able to pay dividends with cash that might have come from lenders rather than profits. Private equity firms were able to bolster their returns by having companies they owned borrow more money and use the cash to pay dividends. Now some of those same companies are struggling to find cash to finance operations. The pain from the excessive payouts to shareholders from years past will be amplified by the fact that corporate loans have a lot in common with the exploding mortgages that came to dominate the home mortgage market before it collapsed. Until the recent boom, the vast majority of home mortgages called for the homeowner to make monthly payments for up to 30 years, with the loan paid off by the time the payments stopped. With fixed-rate mortgages, the payment was constant, so a homeowner who kept his or her job could repay the loan even if the home’s value fell. Even with adjustable-rate mortgages, there would be no increased payment unless market interest rates rose.

The new mortgages ended that. Some were known as 3-27 or 2-28 mortgages, with a teaser interest rate for the first two or three years, and then a sharp increase in payment no matter what happened to market rates. Others were interest-only, or called for payments of even less than the interest being accrued. The common thread was that the borrower would have to refinance at some point. Now, of course, many cannot. Their homes are not worth what is owed, or their income is not adequate to support such a loan under the tighter prevailing standards. In the business sector of the economy, similar loan terms were common. Many companies were financed by bank lines of credit that had to be renewed every few years. Even bond issues were only for 5 or 10 years. Most commercial real estate loans in recent years called for payments of just the interest, with the entire loan to be refinanced within 10 years.

To make things seem even better during the good years, lenders were willing to lend larger sums, assuming that rents would rise rapidly in commercial buildings, or that profits would do the same at companies. Where that did not happen — which is to say at most places — many loans will not be able to be rolled over when they mature. Unnecessary bankruptcies loom. So did dividends lie? Perhaps they were simply misunderstood. Their real message from 2004 through 2006 was not that corporate America was doing so well. It was that lenders had embarked on an unsustainable credit expansion that was sure to end in tears.

After the season of goodwill, comes the season of kitchen sinks. TimeWarner's $25 billion write-down of goodwill and other intangibles Wednesday offered a taste of things to come. Asset values in general have fallen sharply over the past year, with the drop coming on the heels of an acquisition boom. Companies could be tempted to get bad news out during an earnings season most investors have likely written off already. Commodities-related stocks look vulnerable. Energy, utility and mining companies accounted for 12% of M&A volume during the past three years, according to Dealogic.

Write-downs aren't merely driven by public market movements, but some assets look exposed. One example is Rio Tinto Group's Alcan unit, particularly following fellow aluminum smelter Alcoa's latest cutbacks. Another is ConocoPhillips' 20% stake in Russian oil major Lukoil. Public markets indicate a value of $6.2 billion. The book value of Conoco's investment was $12.9 billion at the end of the third quarter. Neil McMahon of Sanford Bernstein points out that oil majors are also exposed through potentially having to write down the value (and quantity) of reserves in the ground as energy prices fall.

Investors may choose to look through such noncash charges. But the underlying message -- of falling fundamental value or management having overpaid in the past -- is inescapable and could undermine the recent market rally. Merrill Lynch analyst Richard Bernstein points to a sting in the tail: the potential impact on credit ratings. Besides equity investors, investment-grade bond holders should watch out.

Ilargi: This one is simple: everyone who buys a home with a mortgage these days is a flaming basketcase. Home prices have much much further to fall. Rent!

Massive efforts by the Federal Reserve to bring down mortgage rates have so far been a success, but homeowners had better act fast because analysts say record low rates could be gone as soon as this summer. Thirty-year mortgage rates dropped to a low of 5.01 percent this week -- their lowest since 1971 -- after the Federal Reserve unveiled a plan in late November to buy as much as $500 billion of securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. They could touch as low as 4.50 percent, but the cheap loans will not last long, mortgage experts warned. "The downward trend we have seen in mortgage rates will not last beyond the first half of this year," said Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania. "By then, the Federal Reserve's program will have run its course and other issues will move to the forefront that could push mortgage rates higher," she said.

The Fed has also embarked on a program to buy up to $100 billion in unsecured debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks in a move also aimed at lowering interest rates on mortgages. The prospect of affordable home financing has provided a glimmer of hope for the U.S. economy with the housing market in the worst downturn since the Great Depression. But if mortgage rates rise, they will further paralyze a housing market already beset by plunging home prices, an unwieldy supply of homes for sale, tighter lending standards by risk-shy banks and surging foreclosures. Even if the Fed extends its mortgage bond buying program past the summer, its other efforts to flood financial markets with cash will work against low rates. They include the inflationary impact of both the Federal Reserve's near-zero interest rate policy and the massive looming fiscal stimulus from the government which must be paid for by more government debt, pushing up interest rates.

A 30-year fixed-rate mortgage at 4.50 percent is a level apparently targeted by policy makers. Moody's Economy.com forecasts interest rates hitting 4.50 percent by the middle of 2009 after dropping to a low of 4.37 percent in the second quarter. But, by the third quarter and fourth quarter interest rates will be climbing to 4.57 percent and 5.18 percent, respectively. By the first quarter of 2010, rates should be at 5.87 percent, Chen said. "Low mortgage rates are important, but there is no evidence that lenders are lending and that is crucial," she said. Treasury yields, which move inversely to price, are linked to mortgage rates. The Treasury is seeking to fund an estimated deficit of $1 trillion or more over the coming year.

Cameron Findlay, chief economist at online loan broker LendingTree.com in Charlotte, North Carolina, said mortgage rates at 4.50 percent remained possible, but not probable. "For now the Fed has implemented change to entice rates to decline and are in a holding pattern to see the impact," he said. "Up until a few weeks ago, people thought 4.50 percent was a realistic target for rates within 60-90 days, but that idea has dissolved," he said. What has changed since November is the Fed's decision to ax interest rates to almost zero to help revive the economy, leaving the central bank with fewer options to cut rates.

Findlay said mortgage rates should stay in a range between 5.00 percent and 5.50 percent for the next eight weeks or so barring any additional Federal Reserve action. Expectations of a 30-year fixed-rate mortgage at 4.50 percent are too ambitious, said Greg McBride, senior financial analyst at Bankrate, Inc, in North Palm Beach, Florida. "Inflation worries may begin to spook investors and that could send Treasury yields higher, which would cause a corresponding move higher in mortgage rates," he said.

Fannie Mae is testing a new program to stave off foreclosures by preapproving "short sales" of homes, in which mortgage companies allow homeowners to sell houses for less than the value of existing loans, forgiving the difference. As the number of homeowners in default on their mortgages began to rise several years ago, real-estate agents started touting short sales as a way for troubled borrowers to sell their homes quickly to potential buyers looking for bargains. Real-estate agents reasoned that banks and mortgage companies would go along with short sales, because they tended to lose less money in the transactions than if a home fell into foreclosure.

Short sales, with mortgage firms forgiving part of a loan's value, have faced frequent delays. Fannie has started two pilots to speed the process. In reality, most short sales unraveled, because lenders, servicing firms and mortgage guarantors rejected the sales price agreed upon by the buyer and seller, or because it took the mortgage companies too long to approve the transactions and the deals fell through. "Short sales have received such a bad reputation among real-estate agents that, as a portion of the overall mortgage market, they have gone down," said Tom Popik, a survey director for research firm Campbell Communications. "We hear a lot of people say, 'I'm tired of doing them. They've been a nightmare.' " A survey Campbell conducted in November of real-estate agents found that the average wait time to get an answer from a lender on a short sale stretched to 8.1 weeks, up from 4.5 weeks in a survey conducted earlier in 2008.

Fannie Mae wants to reduce that delay and spur sales by agreeing on a price for a home -- and the loss Fannie is willing to take on the sale -- even before a buyer has been found. Two pilot projects, in Phoenix and Orlando, Fla., began at the end of December and will last for three months. The test run is limited to properties secured by a Fannie Mae mortgage and serviced by Countrywide Financial Corp., a subsidiary of Bank of America Corp. Only homes already listed at less than the unpaid balance on the mortgage are eligible for the pilot. So far, about 400 homes have qualified for preapproval between the two markets.

While mortgage holders still take a loss with a short sale, they don't have to take possession of the home and find a new buyer. An analysis by Clayton Holdings Inc., which tracks mortgage loans for investors, found that short sales result in average loan losses of about 19%, compared with an average loss of 40% for homes sold after foreclosure. Fannie Mae officials say that if the pilot program is successful, it may be expanded to other lenders and regions. "Fannie Mae's goal is to make the short-sale process as fast as possible for homeowners in financial distress," in order to ensure a "graceful exit strategy for homeowners," said Kevin Brungardt, Fannie Mae's vice president for servicing management.

Both Phoenix and Orlando have been particularly hard hit by foreclosures. Home prices fell in the Phoenix region 33% last year through October, according to Standard & Poor's/Case-Shiller home-price index, the worst decline in the country. Some 29% of the state's borrowers had negative equity in August, and an additional 6% of borrowers were approaching negative equity, according to a report by First American CoreLogic, a data provider. In the nation's hardest-hit housing markets, where many borrowers owe more than their homes are worth, short sales are often the only alternative to sales of foreclosed homes. "Values have come down so far that everybody here's upside-down," said Ron Leis, a Sacramento, Calif., real-estate broker who says about 80% of the properties he sells are bank-owned. "Until we can come up with approved sales, we're stuck selling foreclosures," he said.

But some real-estate agents say that Fannie's effort may be too little, too late, because prices are declining so quickly -- at a rate of almost 3% each month in Phoenix -- that prices may have fallen by the time a home is preapproved for a short sale. "I don't know how you can determine a price today unless you also have a buyer," said Kevin Kauffman, a Phoenix real-estate agent who specializes in short sales and completed 65 such sales last year. He says a preapproval won't go far "in a market like this, where waiting one month costs you a couple percentage points."

Ilargi: Is this about Bill Gross and dumb luck or about Bill Gross and his Washington and Fed connections? Pimco is on the forefront of handling many bail-out schemes.

Bill Gross’s decision to back out of a $38 billion bond swap for GMAC LLC debt is paying off for his Pacific Investment Management Co. investors now that the U.S. government has bailed out the auto and mortgage lender. Pimco, manager of the world’s biggest bond fund, reneged on a Dec. 15 agreement to join an investor group participating in GMAC’s debt swap and ignored warnings that bankruptcy might follow. While holders led by Dodge & Cox accepted as little as 60 cents on the dollar to reduce GMAC’s debt, the bonds Pimco kept soared as much as 83 percent, to 80.5 cents on the dollar, after GMAC won approval to become a federally backed bank.

Gross, whose fund beat 99 percent of its peers in the past five years, won a bet that the U.S. wouldn’t allow Detroit-based GMAC to fail because its car loans were needed to prop up General Motors Corp. The government approved GMAC’s conversion to a bank on Dec. 24, giving it access to the Treasury’s $700 billion rescue program even though the debt swap didn’t get the 75 percent participation required by the Federal Reserve. "It was a game of chicken," said Sean Egan, president of bond ratings firm Egan-Jones Ratings Co. in Haverford, Pennsylvania. "Some investors benefited whereas others were harmed. They were harmed because they relied on information that was provided by the federal government, which proved to be inaccurate."

GMAC’s $797 million of 7.25 percent notes maturing in 2011, which Pimco owned as of September according to data compiled by Bloomberg, rose to 80.5 cents from 44 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders who tendered those notes for cash got 70 cents on the dollar. GM owned all of GMAC until the Detroit-based automaker sold a 51 percent stake for $7.4 billion in 2006 to a group led by Cerberus Capital Management LP, the New York-based private equity firm. In 2007, GMAC financed about 75 percent of the inventory at GM dealers and a third of GM car buyers.

Soured subprime mortgages and plunging auto sales led to $7.9 billion of losses over the past five quarters, raising doubt about the lender’s survival. GMAC applied to become a bank on Nov. 20 so it could get access to federal rescue funds, and the bond swap was designed to help the firm qualify. GMAC said the Fed would reject its application if less than 75 percent of the debt covered by the swap was tendered. While Pimco was part of the investor group that negotiated better terms and then agreed to tender $10.5 billion in debt, the firm never surrendered its holdings. Gross’s refusal to participate cast doubt on whether the debt swap would be completed, sending GMAC bonds down as much as 5.5 cents.

Gross, 64, told the New York Times last month he wouldn’t tender because Cerberus was trying to bully creditors to reduce their claims by as much as half. Gross told the Times he wanted Cerberus to put more money into GMAC. Pimco owned more than $340 million of GMAC debt as of Sept. 30, according to regulatory filings and Bloomberg data. Only 59 percent of the bonds were tendered. Instead of allowing GMAC to fail, the government relaxed its requirements for the debt exchange and provided $6 billion in aid, saying that the lender’s collapse must be prevented to protect GM, the biggest U.S. automaker, and the nation’s economy. Cerberus and GM must divest most of their ownership under the accord.

"The government said that they needed X, and when push came to shove they were willing to settle for a lower number than X," Egan said. "Certain investors either through direct knowledge or through other means were able to determine that the Fed was willing to bend its rules for bank holding companies." Pimco, a unit of Munich-based Allianz SE, manages almost $800 billion in assets, including the $128 billion Total Return Fund. Led by Gross, the fund returned 4.8 percent last year, in the 93rd percentile among its peers, according to data compiled by Bloomberg. It returned an average of 5.4 percent over the past five years, in the 99th percentile. Mark Porterfield, spokesman for Pimco in Newport Beach, California, declined to comment. Analyst Adam Rubinson of Dodge & Cox, who led the bondholder committee, declined comment.

"The bonds have rallied tremendously based on the fact they’ve received this federal support," said Kathleen Shanley, an analyst at bond research firm Gimme Credit LLC in Chicago. "There’s improved odds they would be paid off at 100 percent. So, that would be better than people who had to make concessions" in the exchange offer, she said. Shanley recommends investors take advantage of the rally and sell because GMAC may continue to report losses and require more capital. Should GMAC fail, the guaranteed notes issued in the exchange would rank ahead of the old notes for repayment.

"The company is in a much more competitive position for the long term as a result of the bank holding company approval," said Gina Proia, a spokeswoman for GMAC. "We needed to execute the things we did in order to get the approval. Everyone is in a better position." Holders of notes that were ineligible for the exchange, such as individual investors who held about $14.6 billion of so- called SmartNotes, also gained from the deal. GMAC’s 7.5 percent SmartNotes due in 2017 climbed to 41.5 cents on the dollar from 15 cents before the conversion, Bloomberg data show. They’re benefiting from "dumb luck," said Egan of Egan- Jones. "GMAC is certainly out of the woods for the next 12 months. After that, it’s an open issue."

The world's largest retailer might not be immune to the economic slowdown after all Sometimes low prices aren't enough. The outlook for retailers has turned so bleak that even Wal-Mart is feeling the effects of the consumer slowdown. The world's largest retailer had looked like it was actually benefiting from the economic slowdown as consumers flocked to its low-priced offerings. Wal-Mart's stock posted a gain in 2008, one of just a handful of large-company stocks to do so.

But on Jan. 8, Wal-Mart warned that fourth-quarter profits could be 12% below previous estimates. December same-store sales, which had been rising strongly as consumers sought out deals, missed expectations by rising only 1.7% in the U.S.Pinching Pennies The stock market was expecting weak retail results from the holiday season, but not necessarily from Wal-Mart. Analysts and investors noted that Wal-Mart customers were buying necessities, such as groceries, rather than luxury items. Also, discount stores were attracting cash-strapped consumers who otherwise might prefer more upscale shopping venues.

But Morgan Stanley analyst Gregory Melich notes that half of Wal-Mart's sales aren't in groceries but in discretionary items. "If those categories are weak, profits can be weak," he wrote in a note on Jan. 8. One problem for Wal-Mart: Other retailers, such as Nordstrom or Limited Brands, offered big discounts of their own to attract stingy consumers. Retailers with heavy promotions may have won customers at the expense of "everday value" chains like Wal-Mart, says Robert W. Baird & Co. consumer and retail analyst David Cumberland.

Also, according to Wayne Titche, chief investment officer of AMBS Investments, consumers may be trading down to cheaper merchandise amid a weakening economy, but they're also looking for good value. He wonders if Wal-Mart discounted the wrong items in some cases. "It's not just trading down. It's perceived value for the money" that matters, Titche says. Wal-Mart garnered much publicity with its "Black Friday" offerings of deeply discounted flat-screen TVs. But low-quality televisions at a discount won't attract as many buyers as discounts on high-quality TVs, Titche notes. "Just offering merchandise that's cheaper doesn't get someone to buy it."

Of course, the Bentonville (Ark.) behemoth wasn't alone in its misery. December sales suffered nearly across the board from bad weather in many parts of the U.S. as well as from a dramatic cutback in spending. Higher-end retailers were hit hard. Saks last month saw same-store sales drop 20%. Abercrombie & Fitch posted a 24% plunge in same-store sales. At Sears' Kmart chain, December same-store sales fell 1.1%, but the chain's domestic same-store sales was off 7.3%. Nordstrom reported a decline in same-store sales of 10.6% in December.

Many chains responded to weak demand by slashing prices and offering discounts just before Christmas. But those markdowns hurt profits. Nordstrom, for example, warned that now it doesn't expect to meet previous earnings projections. It will take longer—until full quarterly earnings reports are released—to find out how profit margins were affected, says Catherine Fox-Simpson, a tax partner at BDO Seidman who watches retail and consumer businesses closely. Retailers are caught in a trap. If they discounted deeply, fourth-quarter profits will be hurt. But if they kept prices high, they're likely stuck with merchandise on the shelves.

"A lot of retailers still have a tremendous amount of inventory on hand that they have to liquidate," Fox-Simpson says. Indeed, inventory figures are likely to remain a focus on Wall Street. Investors appeared to be cheered by Sears Holdings' news on Jan. 8 that it had reduced inventories from a year earlier, bidding the shares higher despite Sears' dismal sales performance. For investors brave enough to buy retail stocks in this environment, a popular strategy is to seek out strong retail chains that can survive the recession and then prosper during a recovery.

Titche sees a "a major shift in people's perception of debt and risk." That's driving the slowdown in spending, which is forcing many chains to close stores or even go out of business. However, he adds, "You're starting to see winners and losers emerge." His funds own Wal-Mart shares, as well as Kohl's, Best Buy, and Staples—all of which he sees benefiting from rivals' problems. Greg Estes, a portfolio manager at Intrepid Capital Management, warns that it could take a while for such a retail investing strategy to pay off. "There's not really going to be a catalyst anytime soon for things to turn around," he says.

After its disappointing December sales report, Wal-Mart shares fell 7.5% on Jan. 8, to close at 51.38. Adding to investors' disappointment was weakness in Wal-Mart's Sam's Club warehouse chain and a drop in sales overseas due to the rising U.S. dollar. "The current economy remains challenging for all businesses, and retailers have already seen customers pull back on discretionary spending," said Wal-Mart chief financial officer Tom Schoewe in a statement. "Consumers are very focused on value and necessities." The question for Wal-Mart and other retailers is how long the consumer slump will last.

One positive for Wal-Mart may be federal economic stimulus, Estes says. Wal-Mart benefited from stimulus checks in 2008. "People took their tax checks and got groceries and necessities," Estes says, "not jackets from J. Crew". Discounter's Advantage Baird's Cumberland says "consumers are very likely to continue to focus on getting the best deals." That remains good news for discounters like Wal-Mart. Now that the holiday season is over, Wal-Mart might benefit from fewer sales and promotions at other retailers, Cumberland adds. "Wal-Mart will stand out again on a relative basis."

Morgan Stanley's Melich notes that traffic in Wal-Mart stores continues to increase even if profit estimates are falling. "It is gaining customers," he wrote, "and should be one of a few retailers growing profits in 2009." Wal-Mart remains in a strong position compared with rivals. But despite some positives, the retailer remains at the center of one of the economy's toughest industries. Consumers could be cutting back spending for some time to come, and Wal-Mart's upscale competitors appear to be fighting to hold onto business, even at a cost to profit margins. The 800-pound gorilla of retail is finding that it's a jungle out there.

Boeing commercial aircraft orders more than halved last year, as demand from airlines plunged from the record levels reached in the three previous years. Deliveries also dropped sharply as the leading US exporter was hit by an eight-week strike by its assembly workers during the autumn, allowing Airbus, the rival European aircraft maker, to re-establish its leadership of the global commercial aerospace industry.

Airbus, part of EADS, the leading European aerospace and defence group, will announce its full-year numbers next week, but already by the end of November it had surpassed both the orders and delivery totals reached by Boeing for the full year. The US group, led by Jim McNerney, chief executive, has suffered a year of serious setbacks in its commercial aircraft operations, as the long period of industrial strife added to the embarrassing and increasingly costly delays in two of its flagship new aircraft development programmes.

Boeing said yesterday its net new commercial aircraft orders had fallen by 53 per cent last year to 662, from the record 1,413 achieved in 2007. Boeing had previously achieved three record years with net new orders of 1,044 in 2006 and 1,002 in 2005. It said yesterday the 2008 orders total was the eighth highest in its history, but demand from airlines around the world is falling fast amid the deepening recession and the credit crunch, and orders are expected to plunge again this year. Boeing said its deliveries had fallen by 15 per cent last year from 441 to 375. Airbus has previously forecast its deliveries would exceed 470 in 2008, a new peak and up from 453 in 2007.

Boeing was forced to announce last month the fourth set of delays for its 787 Dreamliner long-haul jet, postponing initial deliveries to the first quarter of 2010, a delay of nearly two years. Beset by parts shortages, design problems and incomplete work by its suppliers, the 787 was originally planned to arrive in service in May last year. Boeing has delayed the first test flight, originally due in the late of summer of 2007 to the second quarter this year. Virgin Atlantic, the UK long-haul carrier controlled by Sir Richard Branson, said yesterday it had been informed by Boeing its first 787 deliveries would be about two and a half years late and were due in the third quarter of 2013 instead of March/April 2011.

Like many other carriers hit by the 787 development problems, Virgin Atlantic said it was in talks with Boeing, Airbus and aircraft lessors about interim solutions and alternative orders to allow it further capacity growth in the next few years. Boeing's development of the 747-8, a stretched version of its venerable 747 jumbo, has also been delayed by over-stretched engineering resources, supply chain problems and design changes with first delivery of the freighter version recently put back by almost a year from late 2009 to the third quarter of 2010.

Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies. Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.

"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said. Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June. The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan. He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."

Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3pc will offer a real return of 4pc a year, which is stellar in this grim climate. "Don't start selling your government bonds," Mr Dugan said, dismissing talk of a bond bubble as misguided. He warned that the eurozone was likely to come under strain this year as slump deepens. "There is going to be friction as governments in the south start talking politically about coming out of the euro. I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness."

Ilargi: Ambrose Evans-Pritchard, who yesterday said native English speakers never use the term PIGS for southern Europe, while he has used it countless times himself, now wants to use the term Keynesianism against the Germans, who in turn have used it vs Britain. Take the whole article with a trainload of salt. Ambrose can't stand the fact that Britain is the biggest loser.

I saw a BBC program last night with Gillian Tett, FT editor, James Caan, businessman, and a somewhat girly man of Asian descent whose name started with Sushi and who had worked at the Bank of England from '92-'02. Sushi kept on hammering out that there was no time to lose in Britain to get into quantitative easing. Caan asked him for ONE example of a country where that policy had succeeded. Sushi's answer: it works in the US right now. OHMYG0D!. Tett was just confused. Homework, Gill!

It all once more made clear to me that we are dealing with a bunch of religious fanatics who have no proof to show for their theories. And zealots do real harm.

Dire day for Europe as Spain's jobless blasts through 3m and German industry goes into "free-fall". German exports and industrial orders have both plunged at the steepest rate since modern records began and Spain's unemployment has surged above three million, capping one of the most disastrous days for Europe's economy since the Second World War. Joaquin Almunia, the European economics commissioner, warned that the picture would turn "dramatically worse" this year. The eurozone's confidence index collapsed from 74.9 to 67.1, the lowest since Brussels started collecting the data in 1985. "It makes truly dismal reading," said Julian Callow, Europe economist at Barclays Capital. "Industrial sentiment has never experienced such a rapid slump. There is an implosion of demand."

Spain lost almost 140,000 jobs in December, pushing unemployment to 3.1m or 13.4pc. The Labour Office said the country had shed a million in jobs in 2008 as the building boom collapsed. This is equivalent to 7m job losses in the United States. The Labour Secretary Maravillas Rojo said she could not rule out a rise in unemployment to 4m this year. "We are in an unprecedented situation, and 2009 is going to be very difficult," she said. Madrid now has its hands tied under the constraints of monetary union. It cannot slash interest rates or devalue, and it has already exhausted its scope for fiscal stimulus under the EU's Stability Pact. The one piece of good news is that euribor rates used to price almost all mortgages in Spain has dropped for 61 days in a row to 2.88pc.

Spain is now in company at last with Germany, where exports plummeted 10.6pc in November. The German economy is highly-geared to the global industrial cycle and is suddenly facing a vicious downturn as demand for machinery slumps in China, Russia, the Mid-East, and equally important as car sales crash in Italy, Spain, and Britain. The country's trade surplus has shrivelled by a third in one month. "Industry is in free-fall," said Dirk Schumacher, from Goldman Sachs. Germany's industrial orders have plummeted 27pc year-on-year, heralding a drastic economic contraction this year. Berlin is mulling a €100bn fund to rescue companies in distress, on top of its €50bn Keynesian blitz over two years. The fiscal package includes tax cuts and infrastructure spending. Chancellor Angela Merkel's coalition has backed away from plans to `tough out' the recession after a fierce criticism from German economists and industrial leaders.

Berlin is now preparing the part-nationalisation of Commerzbank by taking a 25pc stake in exchange for a €10bn infusion of capital, helping to boost the bank's capital ratio as it digests Dresdner Bank. Commerzbank shares fell 14pc. France is also drawing up plans for a fresh €10.5bn capital injection for its banks. Jacques Cailloux, from the Royal Bank of Scotland, said the pace of contraction in Europe is now disturbingly close to levels seen in the Great Depression. The eurozone bloc shrank by 3pc in 1930, 5pc in 1931, and 4pc in 1932. By this count, 2009 could easily match 1930. The latest data points to 3pc contraction rate since late last year, with no improvement in sight. "Even the worst case scenarios people talked about now look too optimistic.

But at least the authorities have done enough to prevent the vicious downward spiral from accelerating. We've haven't seen the sort of run on bank deposits or mass bankruptices that occurred in the 1930s. That is crucial," he said. Elga Bartsch from Morgan Stanley said the European Central Bank may have to cut rates to 1pc and let its overnight EONIA rate drop to zero. It has already expanded its balance by 55pcc in a quiet shift to emergency stimulus, but may now have to go further than it wants to head off a "deflation trap".

Prime Minister Gordon Brown should buy homes on the verge of repossession to add money to the British economy and save families from being thrown out onto the street, two former Bank of England economists said. The plan would cost about 50 billion pounds ($76 billion) over five years, Fathom Financial Consulting economists Shamik Dhar and Danny Gabay said in a report today. The program would also provide a new economic policy tool as the central bank’s interest rate approaches zero.

The Bank of England yesterday cut its benchmark rate to 1.5 percent, the lowest since the bank was founded in 1694, bringing it closer to the limits of conventional monetary policy. U.K. officials are considering other measures such as buying assets to pump money into the economy as the recession deepens and threatens to exacerbate the housing-market slump. "The smart asset to buy would be housing directly," Gabay said in an interview. "The ideal thing is to go at the core of the problem. This would bring forward the necessary correction. It would to a great extent put a bottom to it."

The government would finance the program by selling bonds, which the Bank of England could buy up to expand the supply of money, Fathom said. The proposals are a more direct intervention in the housing market than measures planned by the U.S. Federal Reserve, which this week started buying up securities backed by mortgages after bringing the interest rate close to zero. Brown’s government would become a "social landlord," charging rent to families and saving them from eviction, Fathom said. The plan would also allow banks to benefit through the removal of outstanding bad debts as financial institutions worldwide nurse more than $1 trillion in losses and writedowns from the credit crisis.

The ruling Labour Party’s surge of support from Brown’s handling of the economic crisis has started to wane. It narrowed the opposition Conservatives’ lead to as little as 1 percentage point in November from a gap of 28 points in September. Labour trailed by 5 points in the most recent poll of voters by ComRes Ltd. published on Dec. 22. "We can’t solve every problem," Chancellor of the Exchequer Alistair Darling said yesterday as he urged mortgage lenders to pass on the central bank’s interest-rate reductions. "There are areas, if we can help, then we’ll do it."

House prices had the biggest drop since at least 1991 last year, declining 15.9 percent, Nationwide Building Society said Jan. 6. Banks are forcing potential buyers to raise down payments and are charging more for mortgages, pushing property prices down further. The government should step in and "set a floor" under house prices, protecting taxpayers by paying below-market prices for houses and distressed homeowners by paying more than "vulture purchasers," Fathom said. "The average discount will probably be in the region of 10 percent to 20 percent below what asking prices are in the locality for similar properties," the report said.

Fathom also suggested that any shortfall owed to a bank, if the value of the homes were less than the original loan, should be repaid from a share of the rent collected by the government. "The way people are talking about it now is to say: We have a big problem, let’s print money," Gabay said. "But many bailouts haven’t had the desired effect. Investors are still fearful of potential losses. We’re trying to say: If we’re going to do it, how would it work?"

For the British, skiing in the Alps has suddenly become unaffordable and those summer vacations on the Costa Brava are under grave threat. The pound, formerly one of the world's most expensive currencies, is only worth a bit more than the euro. Brits, however, are still insistent in their refusal to adopt Europe's common currency. Sterling-shock, pound zero, the one-pound euro. For weeks now, Britain's tabloids have been painting a dark picture of an approaching national trauma. There were moments when it seemed like everything was over: The proud sterling, outflanked by the euro, was ridiculed as a "toilet paper currency." In recent days, the wobbling pound has recovered slightly, but the P-word is still on everybody's lips: Parity.

Reports trickled in of British tourists receiving less than one euro in exchange for the pound. The Sun even calculated that so-called "booze cruises" across the English Channel to buy beer and wine at once bargain prices were no longer worth it, since alcohol in France has become much more expensive. Even the left-leaning Guardian lamented: "Mamma mia! Has the financial crisis really made us poorer than the Italians?" In the past year, the pound has lost around one-fourth of its value. At the start of this week, the currency's precipitous fall was halted, for the time being, by markets expecting the European Central Bank to reduce interest rates and speculating against the euro. Still, with Britain especially hard hit by the financial crisis, the pound remains under pressure.

The weak pound has given British euro advocates hope for the island. For the first time in years, they've been given an opportunity to break through their countrymen's deepset euro-phobia. A strong euro, they speculate, will make switching currencies more attractive. A well-timed report will be presented in London next week: "10 Years of the Euro - New Perspectives for Great Britain." The general tone of the report, which features contributions from 30 politicians, professors and influential leaders, is that it's time to embrace the euro. In the past, the governing Labour Party consistently shied away from the euro. Prime Minister Gordon Brown has always been a resolute euro-opponent -- even as chancellor of the Exchequer under Tony Blair -- because he considered Britain's economic model to be superior. Despite the fact that the Anglo-Saxon model of capitalism has been discredited, he wants to avoid the spread of dangerous rumors.

When European Commission President Jose Manuel Barroso recently rejoiced that important people within Britain's government were considering adopting the euro, his statement was speedily refuted. The opposition Tories immediately suspected the rumor's source as being Business Secretary Peter Mandelson, a former EU commissioner and well-known euro fan. Brown has good reason to be cautious: Talk of the euro is fodder for the Conservatives and their supporters in the press. In a recent Sun article, the Tories' shadow foreign minister, William Hague, accused people like Mandelson of being responsible for "talking down the sterling." The Tories are well aware that voters stand behind them on the issue. Nothing has changed in terms of the country's widespread aversion to the euro. "Currency fluctuations do not affect the British love for the pound," says Martin Boon, a pollster for ICM. Many consider their currency to be synonymous with national independence.

In a poll conducted shortly before Christmas, Boon's institute found that 71 percent of those surveyed were against Britain joining the euro-zone. Only 15 percent said they were open to adopting the euro because of the weakened status of the pound. These results come as little surprise to pollsters. "The underlying hostility towards the euro runs deep," says Graig Baker of the polling company Comres. The middle and lower classes, in particular, oppose adoption of the euro. National pride plays a role too, but conservative aversion to the new is an even greater determining factor. Also, those who don't travel much haven't had the positive experiences with the euro that have become a regular part of life for Europeans living on the Continent who can move from country to country without having to exchange their money. Baker hasn't give up hope, however, that, as the full brunt of the recession hits the United Kingdom in coming months, public opinion might shift in favor of the common currency. Nevertheless, he considers a total reversal as improbable. Indeed, the recession has actually created new arguments for the European common currency's detractors.

Instead of retreating into the euro, some government economists suggest making use of the weak pound: Cheap exports and an uptick in tourism could stimulate the economy. Having a different currency could be especially useful in a time of recession, argues Iain Begg, a professor at the London School of Economics. The euro-advocate says that any rash decision to adopt the euro would be misguided. During times of crisis, it is important to have flexible economic options and the euro is more of a long-term strategic project, he says. "One shouldn't join the euro just because one is in trouble," says Begg. Nor does he believe that there will be broad support for adopting the euro. "There might be some backlash in the summer, when the working class hits the Spanish costas and the pound hasn't recovered," says Begg. "But so far it is just the upper middle class feeling the crunch in skiing vacations."

UK manufacturing activity slumped at its fastest annual pace in 28 years in November, shocking the market and suggesting that the economy shrank more than already feared in the final quarter of 2008. The Office for National Statistics said that a much bigger than expected fall of 2.9pc over the month dragged production over the year to -7.4pc, the most since 1981. It was the biggest monthly fall since the Queen's Jubilee celebrations in June 2002, when figures were distorted by early factory shutdowns in celebration. Stripping that out, it was the sharpest monthly drop since 1984, and worse than even the most pessimistic of forecasts. Taking an average, economists predicted a 0.6pc fall for November. Today's data suggest the manufacturing sector is leading the rest of the UK economy into a deep recession. The economy shrank by 0.6pc in the third quarter of 2008, and economists had been expecting a fall of 1pc or lower in the fourth quarter, data for which is due later this month.

Some however said that the fall was likely to be bigger after today's figures, which Howard Archer at IHS Global Insight described as "breathtakingly awful." The Ernst & Young ITEM Club said there was now "downside risk" to its prediction that gross domestic product fell by 1.2pc in the fourth quarter. "These data leave us on course for gross domestic product to fall by 1.1pc in the fourth quarter," said Ross Walker, economist at Royal Bank of Scotland. "Our expectation for the economy as a whole this year is for the most acute fall in output since 1980. Today's data show that British industry was already there in the final quarter of 2008." Other ONS figures out today showed the prices manufacturers charged for their goods were flat in December, despite having fallen over the previous four months. This brought the year-on-year increase down to 4.7pc from 5.1pc. Paul Dales at Capital Economics said: "Looking ahead, the surveys suggest that manufacturing output is likely to continue to plunge from here, despite the lower pounds. It can't be long before this forces firms to reduce their selling prices significantly. It's not a good time to be in industry."

Jane Casulli has been selling coffee and sandwiches in London’s financial district for 10 years and survived the dot-com bust. She says this meltdown is different. Sales at her cafe, a two-minute walk from the local offices of Swiss investment bank UBS AG, plunged 50 percent in the last two months of 2008, and some regulars are requesting monthly tabs to cover their morning lattes. "Customers are now asking how much things cost and bringing sandwiches from home," she says. "People aren’t leaving their offices. Every day looks like a Sunday."

The U.K. economy may shrink more than those of the U.S., Japan and euro region in 2009 after rising house prices and easy credit led Britons to run up 1.44 trillion pounds ($2.18 trillion) of debt, making them among the world’s biggest borrowers. The country’s gross domestic product may contract by 2.9 percent this year, with as many as 2 million people claiming unemployment benefits, the Centre for Economics and Business Research, a London-based study group, said. "What we’re seeing is a very, very serious economic decline," said Ian Barlow, a senior partner at accounting firm KPMG LLP and chairman of London’s overseas investment agency. "The job reductions are clocking up weekly, and bankruptcies are bound to shoot up."

The U.K. capital may lose almost 107,000 jobs by the end of 2010, according to research firm Oxford Economics. Banking, finance and insurance, which employed about 315,000 people in London last year, may cut more than 60,000 positions as a result of the credit crisis. London contributes 18.4 billion pounds annually toward the U.K.’s public finances, or about one-fifth of total revenue, according to a study by the London School of Economics. That’s likely to drop as banks post lower earnings. The bonus pool for bankers will slump by more than 50 percent this year from 3.6 billion pounds in 2008, according to the CEBR. They received a record 8.5 billion pounds for 2007.

The prospect of a shrinking customer base has halted plans to expand Fox & Co., a men’s clothing and accessories store a few blocks from the Bank of England. The shop, which opened in 1868, is struggling to sell brown leather briefcases priced at 800 pounds and umbrellas for 275 pounds. "People are frozen with fear. They are still spending but much more cautiously," said co-owner Michael Dreher. "It’s survival of the fittest."

As Britain’s 15-year economic boom ended, consumer debt rose 7.3 percent last year, amassed through mortgages, loans and credit cards, and now exceeds the country’s annual GDP. In Germany, household debt amounts to 63.5 percent of GDP and in France it accounts for about half the country’s annual output, according to the latest figures from Eurostat, the Luxembourg-based agency that collects EU statistics. As the credit crunch makes borrowing more expensive, consumers risk falling deeper into debt, according to Malcolm Hurlston, chairman of the Consumer Credit Counseling Service, which offers borrowers advice.

The agency received 9,000 telephone calls during one week in November -- the busiest period since the service began in 1993. "In the last few months, credit-card debt has come up remarkably," Hurlston said. "It’s the easiest form of credit to access to pay for essentials." Personal insolvency cases probably surged 20 percent to about 120,000 in 2008, according to Mike Gerrard, a bankruptcy specialist at Grant Thornton U.K. LLP in London. That’s up fivefold from the 24,000 recorded in 1997. "Given the way the economy deteriorated in the last three months of 2008, this year could be a pretty bad one for personal insolvencies," he said.

To combat the recession, Chancellor of the Exchequer Alistair Darling proposed the biggest fiscal stimulus in two decades Nov. 24. The plans for tax cuts and spending will add 20 billion pounds to the economy between now and April 2010. The government will also speed up 3 billion pounds of spending on infrastructure projects such as roads, schools and housing in an attempt to reinvigorate the economy. Shrinking bonuses and rising unemployment have pushed Britain into a budget deficit of 37 billion pounds as of November, data from the Office for National Statistics show.

In an attempt to jump-start the economy, the Bank of England also cut the benchmark interest rate to 1.5 percent yesterday, the lowest since the central bank was founded in 1694. The chancellor’s initiatives are "too little, too late" for small and medium-size business, said Stephen Quest, corporate tax partner at Grant Thornton. Some government-funded projects, including the 2012 Olympics, the upgrade of the London Underground and a new east- west railway, are already under pressure to curb costs, said Tony Travers, a government professor at LSE.

Olympics Minister Tessa Jowell said in a November speech that the U.K. wouldn’t have bid in 2005 to host the games "had we known what we know now." For many consumers, the most tangible help the government is offering is a temporary, 2.5 percentage point reduction in the 17.5 percent sales tax. At Jane Casulli’s cafe, that cuts the price of a latte by 5 pence to 2.05 pounds. Casulli says she won’t charge more to cover higher prices for basics like sandwich meat, which "shot up" last year. "You can’t very well put up the price of a sandwich in this environment, can you?" she said. "People literally haven’t got money in their pockets."

U.K. manufacturing plunged in November, extending its longest streak of declines since 1980, and factories raised prices at the slowest pace in a year as Britain’s recession worsened. Output dropped 2.9 percent in November, matching the biggest drop since 2002, the Office for National Statistics said today in London. Economists predicted a decline of 0.6 percent, according to the median of 20 forecasts in a Bloomberg News survey. A separate report showed producer prices rose 4.7 percent in December from a year earlier.

The Bank of England cut the benchmark interest rate yesterday to 1.5 percent, the lowest in its history, to stave off the threat of deflation as world economies slump. Policy makers forecast a "sharp slowdown" in U.K. economic growth as banks restrict the availability of credit. "This provides concrete evidence that activity is grinding to a halt in the U.K.," said Alan Clarke, an economist at BNP Paribas in London. "There’s a risk of another big move in rates if there’s enough shocking data like this." Factory-gate prices were unchanged in December from a month earlier, the statistics office said. Economists predicted a decline of 0.6 percent from November, according to the median of 14 forecasts in a Bloomberg News survey.

Manufacturing, which accounts for 14 percent of the economy, fell for a ninth month. It dropped 3.3 percent in the quarter through November from the previous three months, also the biggest drop since 1980, the report showed. Twelve out of 13 categories of factory production dropped on the month, led by chemicals and man-made fibers, transport equipment and basic metals, the statistics office said. London-based DS Smith Plc, owner of the Spicers office products band, said Dec. 3 weaker demand across all its trading partners pushed first-half profit lower and limited its ability to charge customers more.

Producer prices didn’t fall on the month because lower gasoline costs were offset by higher tobacco and alcohol product prices, the statistics office said. Manufacturing has so far struggled to benefit from the weakness of the pound. The U.K. currency last year lost around a quarter of its value against the dollar and the euro, the currency of Britain’s biggest trading partner. The International Monetary Fund forecasts recessions next year in the U.S., Japan and the euro area. The U.K. economy contracted 0.6 percent in the third quarter after stalling in the second, government data show.

The central bank cut the key interest rate yesterday to the lowest since it was founded in 1694 to keep the credit squeeze from deepening the recession. The bank may lower rates further as the recession raises a "considerable risk" that the inflation rate will fall below the bank’s 2 percent target, George Buckley, economist at Deutsche Bank AG in London, said yesterday.

An obvious question swirled around Commerzbank's tortured takeover of Dresdner Bank yesterday - why go ahead with a deal that has become so much more troubled in the four months since it was announced? Reeling under the weight of the financial crisis and its consequences for both banks, Commerzbank has been forced to take a hugely expensive slug of capital from the German government. When it returns to profit, the enlarged bank is in line to pay 9 per cent annually on a total of €16.4bn of so-called "silent participations", while a further €1.8bn ($2.5bn) gives the state a 25 per cent stake plus one share, diluting private investors who had already been told to endure two years without dividends.

Germany's second-largest bank is now "not really a viable private sector entity any more", one analyst said. The terms seem to reveal a huge deterioration in the balance sheets of Commerzbank and Dresdner. In November, Commerzbank agreed to take €8.2bn of government capital and said the enlarged bank, post-merger, would have a tier one ratio of about 8 to 9 per cent. Now, after taking a further €10bn its core capital will still only be 10 per cent. According to one analyst, ratings downgrades on some assets - especially at Dresdner - have substantially increased the overall risk weighting of the balance sheet, and thus brought a need for much more capital.

But the capital is not the end of the problems for Martin Blessing, Commerzbank's chief executive, who four months ago was so bullish about the deal he forged. Ahead lies the integration of Dresdner and the steep decline in Germany's economic outlook has made part of the deal's rationale - building a bank even more exposed to German consumers and industry - look shaky. One big part of the answer is that the German government was adamant the deal must proceed. Berlin has been determined to create a second large German bank and, having tacitly approved of Commerzbank's plan to buy Dresdner when it was announced, it did not want to let the deal slip away.

A finance ministry official told the FT the government had become compelled to act after Dresdner's dismal fourth quarter performance, which threatened to torpedo the takeover. "Now we have taken this step, the deal can go through." More broadly, Berlin was also determined to generate a return of confidence in financial markets amid evidence that banks continue to mistrust each other three months after the launch of Germany's €500bn bank rescue package. Berlin is concerned about banks' reluctance to lend to Germany's largest companies and is planning to launch a credit guarantee programme worth up to €100bn to help support businesses.

Klaus-Peter Müller, Commerzbank's chairman, will have played a key role in the reshaped deal and in the government decision. Close to Angela Merkel, the German chancellor, he also had a hand in shaping the government's €500bn bail-out fund. One senior German banker mused privately to the FT recently that one of the chief aims of Berlin's bank bail-out fund was to give financial backing to the Commerzbank-Dresdner deal. The new terms also show how keen Allianz has been to be rid of Dresdner - a thorn in its side for years.

Having already revised the terms last month to allow Commerzbank to speed up the deal and pay more in cash - in effect accepting a much lower price for Dresdner - it is now taking a nominal €2bn of Dresdner's toxic assets on to its own balance sheet, thereby providing a boost to Commerzbank's capital once the merger completes. It will also give another €750m of capital to Dresdner ahead of the deal.

Allianz's stake in the enlarged bank - through which it hopes to sell its insurance as it reasoned it could do with Dresdner - will drop to 14 per cent instead of 18 per cent. Mr Blessing yesterday insisted it was "strategically sensible" to go ahead with the Dresdner purchase even after the collapse of Lehman Brothers deepened the problems of all banks. But the consequences for his bank - now in effect nationalised - have reached further than he could have imagined when the deal was mooted.

Bundesbank President Axel Weber signaled that Germany’s economy may contract by more than the central bank previously forecast as a recession worsens. "The final quarter of 2008 may have been worse than we expected," Weber said in the text of a speech delivered in Cologne late yesterday. "This would weigh on our growth projections for the current year." The Bundesbank in December forecast Europe’s largest economy will contract 0.8 percent in 2009 before expanding 1.2 percent in 2010. With the global economic crisis eroding export demand, German companies are paring output and cutting jobs.

Weber and European Central Bank President Jean-Claude Trichet, who spoke in Slovakia last night, didn’t comment on the outlook for interest rates. Weber referred to the communications blackout period one week before an ECB rate-setting meeting. Trichet focused his speech, which marked Slovakia’s accession to the euro region, on the need for the country to carry out "ambitious" economic reforms. Weber said German companies have improved efficiency over the past decade, making them better equipped to cope with a downturn. He also said lower oil prices and the euro’s decline should cushion the economy.

"Furthermore, globally expansive monetary and fiscal policies this year will help," said Weber, who sits on the Governing Council of the ECB. "Both give reason to hope for a pick-up in economic growth next year." Weber described some "particularly negative" economic growth predictions for Germany as "scare-mongering." Deutsche Bank AG chief economist Norbert Walter predicts the economy may shrink as much as 4 percent in 2009, while BNP Paribas SA economists forecast a 3 percent contraction.

"Some forecasts are presenting downside risks, which are merely potential developments that are unlikely to materialize, as fact," Weber said. The ECB on Dec. 4 lowered its key interest rate by an unprecedented 75 basis points to 2.5 percent and investors expect another cut of at least 50 basis at the next meeting, Eonia forward contracts show.

General Motors Corp.’s Opel unit has been promised conditional bailout guarantees of as much as 1.8 billion euros ($2.5 billion) by the German government, more than the initial request made in November, a state official said. "We have adopted a positive decision," said Joachim Winkler, a spokesman for the Economy Ministry of Rhineland- Palatinate, one of four German states in which Opel has plants. Ruesselsheim, Germany-based Adam Opel GmbH initially asked for "somewhat more than" 1 billion euros in government credit guarantees, GM’s Europe chief Carl-Peter Forster said Nov. 17.

Opel still has to clarify its request for aid in talks scheduled for Jan. 13 with the German Economy Ministry and the four states, Winkler said. "Opel now has to deliver and provide evidence on three or four more points," he said late yesterday by phone. German readiness to back Opel comes as Chancellor Angela Merkel’s government draws up an economic stimulus package of as much as 50 billion euros, the second in two months, to help lift Europe’s largest economy out of what forecasters say may be the worst recession since World War II. Coalition leaders meet in Berlin Jan. 12 to complete the package. Merkel is also mulling a 100 billion-euro fund to help companies struggling to obtain loans on top of a 480 billion-euro rescue plan for banks.

"We are facing an unprecedented set of economic challenges due to the global economic crisis," GM’s Forster said in a statement on the company’s 2008 sales results, published today. Opel, which employs 26,000 workers in Germany, still has to prove that state-backed loans would be confined to its German businesses, Winkler said. The government won’t approve guarantees if loans are channeled to its U.S. parent GM. Opel also needs to specify the research projects it intends to spend possible loans on, he said.

Opel spokesman Joerg Schrott declined to comment on the Jan. 13 talks, saying only that negotiations with the federal and state governments "are making good progress." German Economy Ministry spokesman Steffen Moritz didn’t immediately return calls for comment. German state guarantees for Opel remain indispensable even after GM was pledged as much as $13.4 billion in U.S. loans to pay bills, according to an official of the state government of Hesse who spoke on condition of anonymity. None of the U.S. funds would likely be channeled into European operations, he said. Opel employs 18,000 staff in Hesse, where its biggest German plant is located.

GM said today its European division’s sales fell 14 percent to 150,893 cars in December as all its brands, including Opel, posted declines in the region. Full-year sales in Europe dropped 6.5 percent to 2.04 million vehicles. Merkel said after November’s talks that the government would study a plea for funding and make a decision by Christmas on whether to provide financial support. Opel is a "special case" because of its ties to GM in the U.S., she said then.

Renault SA, France’s second-biggest carmaker, said sales plunged 29 percent last month on a slump in emerging markets, preventing the company from fulfilling its pledge to increase global volumes in 2008. Renault sold 146,758 cars and light trucks in December compared with 205,258 a year earlier, the company said in a statement today. Full-year sales dropped 4.2 percent to 2.38 million vehicles from 2.49 million. "Inventory management and reduction will remain a priority throughout 2009," the Boulogne-Billancourt, France-based carmaker said, without giving any guidance for the year.

European carmakers have shuttered plants and suspended thousands of jobs to reverse a buildup of unsold vehicles as plummeting consumer confidence and tighter credit erode sales. Renault said this week it had reduced inventories to 70,000 vehicles from more than 100,000 in September, after slashing production by 50 percent in the fourth quarter. Last month’s sales decline was led by a 41 percent slump across emerging markets, including Romania, Russia and North African states, as Renault’s low-cost Logan lost momentum. The no-frills model had powered sales growth in the first half of the year, offsetting the decline in Western Europe.

European sales fell 28 percent to 87,398 last month, dropping 7.2 percent for the full year to 1.51 million vehicles, Renault said. The company’s global market share was little changed at 3.6 percent. Renault cut its full-year volume forecast twice since the start of 2008, when it predicted a gain of more than 10 percent. Its pledge on Oct. 15 to deliver growth in full-year sales was rapidly undermined by a 14 percent slide the same month, followed by a 24 percent plunge in November. In February 2006, soon after taking over as Renault’s chief executive officer, Carlos Ghosn pledged to lift sales this year to 3.33 million vehicles and operating profit to 6 percent of revenue. He trimmed his target to 3 million units last July as the economic crisis took hold, then scrapped it altogether three months later.

Starbucks. Circuit City. American Airlines. The list goes on and on. Every day it seems another massive layoff is announced at some of the country's best-known companies. Those job losses, in addition to thousands of mom-and-pop businesses, made 2008 one of the worst years for employment in our country's history. This morning the Department of Labor is expected to announce that in December alone, employers shed more than 500,000 workers. The losses are likely to make 2008 the worst year for layoffs since 1945 when 2.75 million jobs were lost. Granted, the U.S. workforce was smaller back then, but it's still a shocking number.

The projected December losses also show an accelerating number of layoffs in recent months, leaving the prospect for workers in 2009 that much more grim. "Many Americans are both anxious and uncertain of what the future will hold," President-elect Barack Obama said during a speech on the economy Wednesday. And many investors on Wall Street look toward Obama to see how exactly his proposed stimulus plan "will save or create at least 3 million jobs over the next few years," as he says. How he will do that is not yet clear. Obama said he plans to invest in energy, education, health care and new infrastructure.

"We will put Americans to work in new jobs that pay well and can't be outsourced -- jobs building solar panels and wind turbines; constructing fuel-efficient cars and buildings and developing the new energy technologies that will lead to even more jobs, more savings, and a cleaner, safer planet in the bargain," Obama said Wednesday. But, in the meantime, a growing number of Americans are collecting unemployment and desperately searching for new jobs, ones that pay close to what they used to make. Beyond that, fear of layoffs is taking its own toll on the economy. Some workers who still draw a weekly paycheck are cutting back on their spending for fear of losing their job down their road. While they might be saving for that rainy day, their lack of spending is driving the country deeper into a recession and putting their own jobs in jeopardy.

Here's a snapshot of some of the biggest layoff announcements of the past 12 months, provided to ABC News by outplacement firm Challenger, Gray & Christmas. While some of these have already been reflected in the government data, others will be phased in during the next few months. The financial sector has been hit particularly hard in this recession as bad investments and risky loans have gone bad. Banking giant Citigroup had more layoffs than any other company in 2008, according to Challenger, Gray & Christmas, first with a 9,000-job cut announced in April and then another 50,000 jobs eliminated right before Thanksgiving.

It would be an understatement to say that 2008 was a bad year for U.S. automakers who had to turn to the government to bail them out for the time being. First, record-high gas prices drove consumers away from large SUVs and trucks that had been the bread and butter of the automakers for years. Then, banks started to cut off credit to consumers, making car loans harder and harder to come by. As part of its efforts to try and remain profitable, GM in May announced the layoff of 19,000 hourly workers. Retailers had a particularly hard Christmas as consumers cut back on their spending. But even before the holiday shopping spree, KB Toys, with 275 stores in malls and nearly another 200 temporary and outlet stores, filed for Chapter 11 bankruptcy protection. It was the second filing in four years for the company. As the toy store company goes out of business, 15,000 workers will lose their jobs.

Things weren't so great in the restaurant business this year, either. Americans struggling with rising mortgages and high gas prices cut back on the number of times they ate out. One of the casualties was Bennigan's, which, in July, filed for bankruptcy, closing all the company-owned restaurants. About 9,300 people lost their jobs. Even rocket scientists aren't immune from the bad economy. Faced with budget cutbacks, NASA announced in June that 7,000 employees at the space agency would lose their jobs. High oil prices also took their toll on the airline industry. Airlines were forced to slash routes and ground older, gas-guzzling planes. With fewer flights, they needed fewer employees. In July, American Airlines announced 7,000 layoffs as part of its cost-cutting measures.

Shock waves spread throughout the financial world when Lehman Brothers filed for bankruptcy Sept. 15, the largest bankruptcy in U.S. history. British bank Barclays purchased Lehman's North American investment-banking and trading divisions, saving some jobs. But an estimated 16,000 people still lost their jobs in Lehman's collapse. Alcoa, the largest U.S. aluminum producer, announced last week it will fire 13,500 employees in response to shrinking demand for aluminum. Basically, in this global recession, there is less need for aluminum as fewer people buy cars, appliances and other products that use the lightweight metal. This was not the year to be in the upscale coffee market. Starbucks, facing competition from lower-cost companies, such as Dunkin' Donuts and McDonald's, announced in July it was closing 600 under-performing, company-owned stores and cutting U.S. expansion plans amid concerns about America's slowing economy. As part of those store closings, 12,000 jobs were lost.

The largest bank failure of the year came when too many bad loans finally caught up with Washington Mutual, the nation's largest thrift. JP Morgan Chase purchased the bank for $1.9 billion. In December, JP Morgan announced the elimination of 9,200 jobs related to the WaMu acquisition. Another 9,160 jobs were cut in May by JP Morgan in connection to its acquisition of failed investment bank Bear Stearns. In the past few years, consumers have flocked to electronics stores to buy new high-definition televisions, DVD players, digital cameras and all sorts of other electronics. Those purchases waned as the recession grew deeper, pushing struggling Circuit City over the edge. In November, the company filed for Chapter 11 bankruptcy protection. The move came a week after the retailer announced it was closing about 155 Circuit City stores. As part of the store closings, 7,305 jobs were cut.

Things aren't too good, either, for the country's largest telecommunications company, AT&T. If businesses are shutting their doors, they don't need phones. In December, AT&T said it was eliminating 12,000 jobs because of tough market conditions. With less business out there, there are fewer packages being shipped. In May, DHL's German parent company announced plans to cut costs in its U.S. express delivery business by hiring UPS to handle North American air cargo transportation. The change meant 6,800 jobs would be cut.

The number of laid-off workers who are continuing to draw unemployment checks jumped more than expected to 4.6 million at the end of December and is likely to keep climbing this year -- fresh evidence that people are finding it increasingly difficult to get a new job amid a deepening recession. The Labor Department's report Thursday also said first-time applications for jobless benefits dropped to 467,000 last week. But economists largely described that decline as a distortion, reflecting the government's difficulty in making seasonal adjustments over the holiday period. Even with the dip, the figure still signaled trouble in the labor market. A year ago, initial claims stood at 330,000. Persistent economic woes -- housing, credit and financial crises -- along with a flurry of layoffs announcements in the opening days of 2009 all point to another terrible year for jobseekers, economists said.

Job hunter Barbara Slavin of Los Angeles knows that frustration. "Many of the jobs I applied for I was qualified for and didn't get them," laments Slavin, 67, who was laid off last month as an executive assistant for a local Girl Scouts chapter. "I've got a lot of energy. I like to work, and I don't know anybody who can live on Social Security alone." She has worked a variety of places over the years, including a catering kitchen, a corporate newsletter and a software company. The government's report showed that the number of people continuing to collect unemployment benefits rose by a sharp 101,000 to 4.6 million for the week ending Dec. 27, the most recent period for which that information is available. It was worse than the 4.5 million level of claims that economists had expected.

That increase left continued claims at the highest since November 1982, when the country was emerging from a deep recession, though the labor force has grown by about half since then. A year ago, this figure stood at nearly 2.7 million. The increase underscored the painful deterioration that has occurred in the jobs market. "Workers getting laid off are not going to get hired any time soon," said John Silvia, chief economist at Wachovia. Some economists believe the number of people drawing unemployment benefits could rise as high as 5.5 million this year -- even if a new government stimulus package is enacted. President-elect Barack Obama called for a bold approach to revive the moribund economy. "I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible," he said Thursday, the fourth straight day he talked about the economy, the No. 1 concern of most Americans.

"If nothing is done, this recession could linger," Obama warned. "The unemployment rate could reach double digits." With employers throttling back hiring, the unemployment rate is expected to jump from 6.7 percent in November to 7 percent in December, which would be the highest in 15 1/2 years. The government releases that report Friday. Obama, who takes over Jan. 20, is championing a massive package of tax cuts and government spending that could total $775 billion over two years. With add-ons by lawmakers, the package could swell to $850 billion, his advisers say. With jobs disappearing, shoppers held tight to their wallets and pocketbooks at the end of 2008. The Federal Reserve said Thursday that consumers cut back on their borrowing on credit cards, and for such things as auto loans, at an annual rate of $7.94 billion in November, the biggest decline in 65 years of record keeping.

And retailers on Thursday reported dismal sales figures for December. Even Wal-Mart Stores Inc. finally buckled under the pressure of the sinking economy, with its sales rising less than analysts had expected. Among the many retailers that reported steep sales declines were Sears Holdings Corp., which operates Kmart and Sears stores, luxury retailer Saks Inc. and Gap Inc. Consumers and companies are folding under the forces of the collapsed housing market, a global credit crunch and the worst financial crisis since the 1930s. The recession, which started in December 2007, already is the longest in a quarter-century. "Only government can break the vicious cycles that are crippling our economy -- where a lack of spending leads to lost jobs, which leads to even less spending," Obama said.

This week alone, drugstore operator Walgreen Co., managed care provider Cigna Corp., aluminum producer Alcoa Inc., data-storage company EMC Corp. and computer products maker Logitech International all announced major layoffs to cope with a recession that has just entered its second year. Pink slips are piling higher as companies scramble to cut costs even deeper. Electronic unemployment filing systems have crashed in at least three states in recent days due to the crush of Americans seeking jobless benefits. For all of 2008, employers likely slashed payrolls by more than 2.4 million. That's based on economists' forecasts for a net loss of 550,000 additional jobs in December, as well as the job losses already reported every month last year by the government.

Some, however, think the number of jobs cut last month will be higher -- around 600,000 or 700,000. That information also will be out Friday. If the conservative 2.4 million estimate of net payroll reductions for 2008 proves correct, it would mark the first annual job loss since the previous recession in 2001. It also would be the worst year of job losses since 1945, when employers slashed nearly 2.8 million jobs, though the number of jobs in the U.S. has more than tripled since then. On a more upbeat note Thursday, rates on 30-year mortgages this week fell to a new record low of 5.01 percent, a dose of good news for prospective home buyers -- if they can manage to get a home loan.

Top Kuwaiti investment bank Global Investment House said it defaulted on most of its $3 billion in debt obligations, raising concerns that other Arab Gulf financial firms may follow as the world financial crisis is spreading to the region. "Global confirms that as a consequence of a capital repayment default in the second half of December...the company is in default on the majority of its financial indebtedness," the lender said Thursday, according to Zawya Dow Jones.

Global Investment, which is listed on the Kuwait stock exchange and has global depositary receipts listed at the London Stock Exchange, is the biggest indigenous investment bank in the Gulf by market value and manages one of the region's largest funds. The bank has been in talks to refinance its 830 million Kuwaiti dinar ($2.93 billion) debt after two rating firms downgraded the company, citing a risk of default. "Global's statement today is further evidence that its problems haven't gone away and the situation remains pretty dire," said Robert Thursfield of Fitch Ratings, which for Global has a "C" long-term issuer default rating on rating watch negative.

The development comes amid continuing speculation over the health of Kuwait's financial sector and how it will be affected by the global financial crisis after the country's fourth-largest lender, Gulf Bank, had to be rescued by the government in November amid the emergence of significant trading losses. The Kuwait Stock Exchange All-Share Index has dropped 21.6% in the past two months, according to Zawya.com data, as investors' confidence is being eroded. "Kuwait has significant financial resources and the capacity to cushion some of the impact of the global crisis, but the main issue is now an issue of confidence," National Bank of Kuwait Chief Economist Randa Azar said.

Concerns are also rising over the health of financial institutions and companies in the other oil-rich sheikdoms of the Arabian Gulf as global economic turmoil is beginning to bite the region. "There could be more Gulf companies defaulting as the global economy goes through a recession in 2009, but important lessons can be drawn from these experiences, including greater corporate governance in the years to come," SABB Chief Economist John Sfakianakis said. Mr. Sfakianakis said companies in the six states of the Gulf Cooperation Council, of which Kuwait is a member, were facing credit limitations because of a crunch in the general banking system, but "defaults won't be as wide as those in the U.S. and Europe."

The promise of prosperity lured Quan Xiaoju from her home in rural China to the assembly lines in the bustling city of Guangzhou. Now, like countless other migrant workers, she is heading back home as the jobs dry up and China's boom comes to an end. As she bids farewell to Guangzhou, a city of nine million people, there is hardly enough time for a wistful look back -- at the teeming crowds of migrant workers with copious amounts of luggage in front of the city's train station, or at its bold downtown highway, built on stilts, and still packed with cars despite the economic crisis. The crowd pushes forward relentlessly, literally forcing Quan Xiaoju to enter the station. Xiaoju, a petite migrant worker, quickly places her belongings -- a black-and-white plaid suitcase and a small plastic bag -- on the conveyor belt at the security checkpoint before being pushed onward, then up an escalator and into one of the enormous waiting rooms.

China's global factory is shedding its slave-like workers, cost-effectively and efficiently, almost as if they too were products on an assembly line. They sit in long rows, shoulder-to-shoulder, waiting for the trains that will take them back to their home provinces, to the places they once left for China's industrial east, lured by the promise of prosperity. Xiaoju (her name means "Little Chrysanthemum") finally has time to catch her breath and look around. She has a few more minutes left before her northbound train to Hengyang, in Hunan Province, is scheduled to depart. The station is busy as it would normally be before the Chinese New Year, when companies in Guangdong Province -- the enormous export factory that borders Hong Kong and includes the burgeoning large cities of Shenzhen and Dongguan -- collectively send armies of migrant workers home on vacation. But this time the exodus is involuntary and unforeseen, and likely to last for an extended period of time -- and the mood is understandably gloomy.

Most travelers are noticeably young, including many women like Xiaoju, who is 17 but looks 14. Almost all of the people waiting here for their trains could tell stories similar to those of three female workers from Hunan who have lost their jobs printing colorful stickers for jeans and are now waiting to leave, carrying full plastic bags. Or the young couple from faraway Chongqing, who worked in a textile factory making sweaters and whose belongings -- including a rice cooker, a fan and mattress -- are now almost blocking the way. It has only been a few days since Xiaoju lost her job at an export factory, where she used her thin fingers to make cheap silver jewelry. "The foreigners have stopped ordering," the supervisor suddenly informed two-thirds of the employees. "I don't have any more work for you anymore." Hardly any foreign buyers had appeared at the factory in weeks. The 200 workers must have realized that something was wrong, because the production area was only separated from the office by glass dividers, which enabled their boss to monitor the workers as they sat at long tables, industriously assembling earrings, bracelets and necklaces. Conversely, Xiaoju and her fellow workers were able to observe the effects of the global crisis on their boss, who increasingly sat around doing nothing.

From one week to the next, an eerie silence descended on the normally busy Panyu neighborhood, where the factory was located. At first Xiaoju and her fellow workers noticed other factories closing their gates. And because more and more workers were leaving, many street food vendors quickly dismantled their stands. After that, the billiard tables along the side of the street, where the men would spend what little free time they had, were suddenly empty and abandoned, like a beach town when winter arrives earlier than expected. Xiaoju was not surprised when she was let go. Nevertheless, she was horrified when her boss admitted to the workers that there was no longer enough money left to pay them the monthly wages they were owed. Xiaoju jumps up when her train is announced. The crowd begins to surge forward again, as the travelers hurry down several flights of stairs to the platform, where they board the seemingly endless train, which is fully booked. Xiaoju managed to secure a bed in the sleeping car -- a minor success, given that the slow train takes seven long hours to reach Hengyang.

The train starts moving with a jerk, and Xiaoju begins to realize that her life in Guangzhou, one of the most affluent cities in China, has come to an end. Now she knows that by losing her job, she has also lost the prospect, at least for the time being, of permanently liberating herself from rural poverty -- and that she will have to explain this to her parents at home. She is silent. To distract herself, she types hectic last-minute goodbye text messages into her pink mobile phone, which she bought from the savings left over from her first wages. She could only afford a Chinese-made Jinpeng model, but it looks good and it has a large screen. The purchase was a big step for Xiaoju, whose family doesn't even have a regular telephone at home. Xiaoju clasps the phone tightly in her hand. It is the most important memento of her working life, and the only luxury item she owns. It cost her the equivalent of €80 ($108) -- and about 160 hours of overtime in the factory. A few seconds later, her phone flashes, indicating that she has already received her first response. It is her "Laoxiang," an older female migrant worker from her home village, who Xiaoju had originally followed to Guangzhou. She has written to wish her friend good luck.

Almost everyone in China who has moved from the countryside to the global factory for the first time befriends a generally older and experienced trailblazer from home. When Xiaoju left her village, after the Chinese New Year's festival, she and seven other girls followed their Laoxiang to Guangzhou. Xiaoju's parents gave her the money for the fare, but it was only enough for standing room on the train. But Xiaoju didn't care, because she was so anxious to get to Guangzhou, one of the mega-cities with which the Chinese associate progress and prosperity. Her Laoxiang had assured her that once she arrived in Guangzhou, she would be able to earn a lot of money for her family. From an early age, Xiaoju knew that she would have to move away from the village by the time she finished middle school, because there was no future for her there. Her father ekes out a living as a migrant worker on construction sites, and he lives with her mother and their four-year-old son in another large city far away. Her sisters, 11 and 12, live on their grandfather's tiny farm. When Xiaoju arrived in Guangzhou late in the evening, she was almost blinded by the flashing ads everywhere and the brightly lit windows in 24-hour shops.

On the first night, she slept in her Laoxiang's room. The trip there seemed endless to her, passing one factory after another, each of them a multistory box-like building, the interiors dimly lit with neon lights. The buildings housing the workers were located next to the factories. Xiaoju recognized the crowded lodgings by the laundry that the workers had hung out to dry. On her first day in Guangzhou, Xiaoju's Laoxing got her a job in a jewelry factory. Finding the job was not difficult. There were an estimated 7,000 jewelry factories in and around Guangzhou at the time, and no one had even mentioned the word "crisis" yet. China's economy is still growing today, but far too slowly. It is hard to believe that Xiaoju, after only undergoing a 10-day training program, was able to find a job in the next jewelry factory. By then she was a "trained" worker, and her new boss offered her €140 ($190) a month, or twice her previous base wage. By working overtime, she managed to work 12 hours a day. Overtime is critical for the migrant workers, because it makes for the actual earnings. They can hardly survive on their slim basic wages. Xiaoju's everyday life consisted of hard work. Using a device she compares with a candle, the young worker would pour a liquid silver mixture into a mold for rings. Sometimes the hot silver dripped onto her hands, "and then my skin burned and got red spots," Xiaoju reports. "In a second step, we had to insert small diamonds into the rings -- but the stones weren't real, just made of glass."

Every day, after coming from work shortly before midnight, Xiaoju fell, exhausted, onto her mattress. "Most of the time, I didn't even have the energy to wash my face," she says. Her mobile phone lights up again. This time it is a text message from a friend with whom she shared a room and the mattress in a building near the factory. It was cheaper than at the factory, where eight people were housed in each room and people had to wait in line for the showers. Xiaoju's friend will also have to return home soon. The girls often comforted each other when they felt homesick, or when their boss cursed at them because they weren't working fast enough. Then they would lie in bed together at night, just as Xiaoju did at home, where she and her siblings slept in the same bed. Every morning the two friends had to report for work at the factory. During their long working hours, they would often work feverishly in anticipation of the two days they had off each month. During their time off they would take the subway into downtown Guangzhou, strolling through the garishly lit shopping malls or admiring expensive designer fashions in the boutique windows. Then they would buy the imitations in low-priced markets, and Xiaoju was convinced that she would never be able to live in the countryside again.

At least until she was let go, Xiaoju believed that the day would come when she would make as much money as her boss. He was from Hunan and started out as a migrant worker, in a jewelry factory, before founding his own factory 10 years ago. As recently as the 2008 Summer Olympics, the Chinese economy was still bursting with energy, and no one expected the boom, which has lasted for years, to end anytime soon. The workers in the jewelry factory had so much work to do that their boss turned down their request to be able to watch the games on TV. They were only allowed to watch the opening ceremony. "It was beautiful," says Xiaoju, "but I was so tired that I fell asleep in the middle of it." Now that she is on the train, somewhere between Guangzhou and Hengyang, Xiaoju dozes off again. The past few days have put her nerves on edge. For days, she and her fellow workers persisted at the factory, hoping that their boss would at least pay them the one month of wages they were owed. In the end, they left when the boss promised to send them their wages later on. Xiaoju believes her boss, noting that he too comes from Hunan.

At least Xiaoju's boss did not simply abandon the factory, escaping at night, like the owners of other bankrupt factories in the neighborhood. Xiaoju heard how angry workers seized the machines in those factories. And in some factories, she says, the workers even organized gangs of thugs to collect their outstanding wages. But these have been isolated cases so far. Most of the laid-off workers take the crisis personally, not politically. For "Little Chrysanthemum," too, the government in Beijing is far away. She has few expectations of the country's leaders, nor does she blame them for anything. "No one can be held responsible for the crisis," she says, as if she were talking about a natural disaster. "It strikes everyone in the same way." Xiaoju is now looking excitedly out of the window at the fields, where the crops have already been harvested, as the train approaches her hometown. Other migrant workers are already packing up their things. They will be with their families soon, where they can at least expect to get something to eat and have a roof over their heads. The potential for unrest coming from migrant workers is weakened by the fact that they are so widely distributed among the villages. The train stops in Hengyang, an industrial city of more than seven million people. From there, Xiaoju must travel another hour and a half by minibus to her village. Acrid smog wafts across the mountainous landscape. It comes from the exhaust fumes from the steel mills and from the countless fires farmers have set to burn their fields.

The stench doesn't bother Xiaoju. In fact, it reminds her of her days in school. She would have liked to continue going to high school, but her family lacked the necessary money. "Perhaps I could learn something new now," she thinks to herself, "to get a better job." But then she shakes her head immediately. "If I went back to school, my father would have to work even harder." The closer she gets to her village, the more uncertain the future seems to Xiaoju. Perhaps her father will urge her to join the army, where a relative is already serving. It would be a secure job. But the idea of military training fills her with horror. Xiaoju must climb up a narrow path to reach her grandfather's house. She uses her mobile phone to light the way. It is dark and many houses are empty. Their owners have also moved to the cities to seek work as migrant workers. Xiaoju pushes open the wooden door and greets her grandfather. Nothing has changed. The bare light bulb hanging from the ceiling, the large bed, the earthen floor and the only symbol of progress: the permanently operating television set. They exchange a few words, but Xiaoju hasn't quite arrived yet. Using her mobile phone, she must first send a series of SMS messages -- to Guangzhou and to her former counterparts in the global factory. "Little Chrysanthemum" cannot imagine that the crisis will last long, and that she will have to hold out here forever. "There are so many factories in China," she says, "and at some point they will have to start making their goods again."

The federal investigation that prompted Gov. Bill Richardson of New Mexico to withdraw his nomination as commerce secretary offers a rare glimpse into a long-simmering investigation of possible bid-rigging, tax evasion and other wrongdoing throughout the municipal bond business. Three federal agencies and a loose consortium of state attorneys general have for several years been gathering evidence of what appears to be collusion among the banks and other companies that have helped state and local governments take approximately $400 billion worth of municipal notes and bonds to market each year.

E-mail messages, taped phone conversations and other court documents suggest that companies did not engage in open competition for this lucrative business, but secretly divided it among themselves, imposing layers of excess cost on local governments, violating the federal rules for tax-exempt bonds and making questionable payments and campaign contributions to local officials who could steer them business. In some cases, they created exotic financial structures that blew up. People with knowledge of the evidence say investigators are not just looking at a few bad apples, but also at the way an entire market has operated for years.“It’s rare to sell a Senate seat, but it’s not rare to sell a bond deal,” said Charles Anderson, who retired as manager of tax-exempt bond field operations for the Internal Revenue Service in 2007. “Pay-to-play in the municipal bond market is epidemic.”

Michael D. Hausfeld, an antitrust lawyer in Washington, who is representing some of the cities, counties and states entangled in the federal dragnet, called it “one of the longest-running, most economically pervasive antitrust conspiracies ever to be uncovered in the U.S.” Many of these municipalities say they did nothing wrong and were duped by financial firms, which they are suing. The possibility of a vast web of collusion would be sobering in any case, but the issue is of particular concern now, as Congress and the incoming Obama administration prepare a big fiscal stimulus package that may spawn infrastructure projects carried out and financed at the state and local level. States and cities issue bonds to raise money to pay for things like schools and road construction, and are supposed to follow strict rules on how the proceeds are handled for investors to receive a tax exemption on the interest.

Mr. Anderson estimated that as much as $4 billion a year was vanishing into the system, based on the volume of problems he saw before retirement. Christopher Cox, the chairman of the Securities and Exchange Commission, has said oversight of the municipal bond markets is inadequate, and has urged Congress to take steps to protect both investors and taxpayers. Congress has not taken up the initiative. The S.E.C. and the Justice Department declined to discuss the details or status of their investigations, including in New Mexico, where work on municipal bonds is part of a federal grand jury investigation. Officials at the I.R.S. said they were giving the matter high priority and had challenged the tax-exempt status of municipal bonds in a number of places but declined to describe individual cases.

Christopher Taylor, who retired in 2007 as executive director of the Municipal Securities Rulemaking Board, said the evidence amassed so far included tape-recorded phone calls, in which the independent specialists who are supposed to help local governments pick their bankers could be heard telling bankers: “We want you to bid on this deal, but you’re not going to get it — you’re going to get the next one. We want you to submit a sloppy bid.” Unsuspecting governments then accepted the recommended bids, and paid too much, he said. Mr. Taylor also cited evidence of banks being paid in cities where they did no work at all, apparently to reward them for throwing the business to their rivals. The business is lightly regulated, with rules governing the conduct of companies set by the municipal securities board. Municipal bond underwriters are prohibited from making campaign contributions to “buy” the business of bringing bonds to market. But no such rules govern the conduct of a type of professional who appeared in the industry about a decade ago — specialists who work with financial derivatives, like swaps and options.

In the last few years, the use of such derivatives in combination with municipal bonds has grown rapidly, market participants say. And so, it appears, has the interest of federal agents. The federal inquiry appears to have started at the I.R.S., which was concerned that the rules for tax-exempt bonds were being trampled. “We saw this coming and went to the Department of Justice and said, ‘Hey look! It looks as if there’s been price-fixing and bid-rigging on a major scale here,’ ” said Mr. Anderson, the retired I.R.S. manager. The efforts have broadened into what investigators and lawyers described as a coordinated effort among the federal agencies broken down by jurisdiction. The S.E.C. polices fraud in the municipal bond markets and is looking into whether municipal bonds are routinely certified for tax-exempt treatment, by people who perhaps know or should know they do not qualify.

The Justice Department’s criminal antitrust division has authority over bid-rigging, and that part of the investigation is being led by federal prosecutors in Manhattan. At the same time, various regional U.S. attorneys’ offices around the country are looking at whether campaign contributions and other gifts to state and local politicians were used improperly to “buy” bond-related business. More than 30 financial services companies have been subpoenaed, including JPMorgan Chase, Merrill Lynch and the American International Group, which have recently received government assistance and in the case of A.I.G., an outright federal bailout. Several have disclosed in corporate filings that their employees have been called to testify before grand juries or have received “Wells notices” from the S.E.C. warning that an enforcement action is looming.

The disclosures follow raids by the F.B.I., in 2006, of the offices of three specialized firms that bring together local officials and the banks and other companies that seek business working on municipal bond sales. One of the three, CDR Financial Products, of Beverly Hills, Calif., is at the heart of the federal investigation in New Mexico. Investigators there are looking at how CDR Financial came to be selected as the “swap adviser” for a $1.5 billion program — called Governor Richardson’s Investment Program, or GRIP — to raise money for road and rail construction in New Mexico. CDR Financial and its founder, David Rubin, gave $100,000 to two of Governor Richardson’s political action committees in 2003 and 2004, and the company earned $1.5 million for advising GRIP in 2004. A Colorado political consultant, Michael Stratton, lobbied on behalf of CDR Financial, and was paid $269,000 by JPMorgan Chase during the same period, according to regulatory filings. JPMorgan was the lead underwriter on about $1.1 billion of bond sales for GRIP.

Mr. Stratton did not respond to messages requesting comment, and a JPMorgan spokesman said the bank would have no comment. Allan Ripp, a spokesman for CDR Financial, said that Mr. Rubin had made the contributions because he supported Governor Richardson’s efforts to register people likely to vote Democratic in the presidential election. He said CDR Financial had competed fairly for the bond business and won its assignment on the merits. Governor Richardson has said that he and his aides acted correctly at all times, and that he withdrew his nomination as commerce secretary only out of concern that the investigation might cause a long and distracting confirmation battle. CDR Financial and the other two firms raided by the F.B.I. — Investment Management Advisory Group, known as Image, of Pottstown., Pa., and Sound Capital Management of Eden Prairie, Minn. — had attracted unfavorable attention even before the F.B.I. raids, in some cases because of campaign contributions.

In Philadelphia, Image and CDR Financial were described as “Company No. 1” and “Company No. 2” in the indictments of the former city treasurer, Corey Kemp, and other officials in 2004. CDR Financial had made political contributions and earned $415,000 for helping Philadelphia link a type of derivative called a “swaption” to its bonds. Image squired the city treasurer around by limo, and was in the running to participate in a school bond sale, but the deal fell apart when a local newspaper, The Daily News, questioned Image’s involvement. Mr. Kemp is serving a 10-year prison sentence for accepting illegal payments in exchange for steering city bond business and other contracts to selected companies. Neither CDR Financial nor Image was formally accused of wrongdoing. The use of derivatives in connection with municipal bonds has grown rapidly in the last five years. The packages are presented as money-savers to the municipalities, which may want to protect themselves against interest rate changes. But over the last year, as turmoil spread through the credit markets, some of the derivatives have blown up, leaving local governments stuck with unexpected costs.

That happened in Alabama, where Jefferson County linked an extraordinary number of derivatives, called interest-rate swaps, to its bonds, in some cases with the help of CDR Financial. Despite publicized concerns about whether improper payments to certain officials were behind the swaps, the county insisted the swaps were saving money. Last year, the derivatives failed, leaving the county with vast bills. Jefferson County is now at risk of declaring what would be the biggest governmental bankruptcy in United States history. Even in places where the bonds and derivatives are performing as expected, irate government officials are finding they may have overpaid for various services and have inadvertently broken federal tax rules. Again and again, proceeds from tax-exempt bonds appear to have improperly generated investment income for banks and insurers. Among the governments that have sued these financial firms are the cities of Chicago and Baltimore; Oakland and Fresno, Calif.; the state of Mississippi; and a number of counties, school districts and at least one water and sewer district. The lawsuits were consolidated in November, in Federal District Court for the Southern District of New York. Chicago has since abandoned that litigation.

Ilargi: Wolfensohn is as much a piece of Ó‡°·ﬁﬂ‡·Ø˜◊ıÇ as the guy in the article after this one.

Former World Bank President James Wolfensohn talks to SPIEGEL about the global financial crisis and his hope that Barack Obama will be the right president to lead the US out of recession.

SPIEGEL: Mr. Wolfensohn, you are known to be an advocate of socially responsible capitalism. How do you view the Wall Street community these days?Wolfensohn: Well, I think the Wall Street community is preoccupied by survival. We're having a downturn of unprecedented proportions, and so it's not surprising that issues of global social responsibility are pushed to the back. That doesn't mean that it is correct and it doesn't mean that we are still not better off in this country than in many other countries.

SPIEGEL: By the way, did you take part in this wild game? Did you lose a lot of money?Wolfensohn: Personally?

SPIEGEL: Yes.Wolfensohn: The answer is no because when I got out of the World Bank and became special envoy to the Israeli-Palestinian negotiations in the Middle East for a year, I got very liquid, and I've never gotten into debt since then. So I've had a very balanced portfolio. Having said that, I learned today that one of the investments that I made with quite a trustful and elite firm is being affected because that firm made an investment in the gentleman who lost $50 billion. And so I had never heard of him, and I never was informed that the investment manager that I had given money to was doing business with him.

SPIEGEL: The gentleman you are talking about is Bernard Madoff, who is alleged to have run a $50 billion Ponzi scheme. You never met him?Wolfensohn: No, but I was given the good news today that unknown to me I had a small part of my investment in assets at that terrible firm.

SPIEGEL: German President Horst Köhler, former head of the International Monetary Fund. ...Wolfensohn: ... I know him extremely well ...

SPIEGEL: ... asked bank managers to apologize for their role in the financial crisis.Wolfensohn: Horst Köhler is a remarkable man, and a very close friend, and it's exactly what I would expect him to demand because he has a very high moral standard. I'm not sure that the people that he is talking about would feel it was necessary to do that. It would be a sort of catharsis but in this country they would have to word their apology very carefully for fear that they would give grounds for legal action.

SPIEGEL: Our former Chancellor Helmut Schmidt says it's all a matter of so-called predatory capitalism. Do you agree?Wolfensohn: Well, it's not the system, the system did not drive it. It was driven by individuals, and the individuals created a capitalist system that was full of excesses and not regulated. So it wasn't because there was a system; it was because individuals took advantage in the absence of appropriate regulation.

SPIEGEL: Has it to do with the American way of doing business, the American way of life, the American dream?Wolfensohn: Well, your banks also in their international activities engaged heavily in this practice and had substantial losses as a consequence of this crisis.

SPIEGEL: But they didn't invent this business.Wolfensohn: Avarice is not contained only in the United States. So if something is making money here, it's very apparent from the reports of your financial institutions and your investors, as well as other foreign banks, that sophisticated investors were investing very heavily in this system. So I give you that it was invented here, but I must say that there were some willing buyers and participants in other parts of the world.

SPIEGEL: Europeans love to feel morally superior to Americans. You grew up in Australia, you became an American citizen…Wolfensohn: … I'm an American citizen, I ran Carnegie Hall for 20 years, the Kennedy Center for five years, and I've done lots of things for social causes here and abroad. And there are many like me. The perception in Europe of these money-hungry Americans is wonderful, but it's not true. I don't think you hear people in the United States talking down Europe. I hear more criticism in Europe of the United States, but I don't think it matters. We're in the middle of a crisis now which is global.

SPIEGEL: And it is hitting Russia, where you just returned from.Wolfensohn: They lost $150 billion in reserves in six weeks, which is a quarter of their reserves, so the ruble is under intense pressure. There are frailties in many parts of the world, and a lot of the people that lost money are not innocent victims of the activities of the United States and Alan Greenspan. They are active participants in the markets. You have a few examples in this country and a few examples in your own country of institutions that have been more sophisticated. Take (German private bank) Metzler Bank, which I happen to know very well. It was not in any of this stuff, but that's because Fritz Metzler is very conservative and smart, and there are a few people here that are equally conservative as well.

SPIEGEL: Our government-owned banks are heavily affected.Wolfensohn: That's what I'm saying. They still have not determined what is the extent of the loss.

SPIEGEL: You are personally focused on the emerging markets. How would China or India feel the pain?Wolfensohn: I think pain is widespread. We had here just a few days ago the visit of a Chinese delegation that was meeting with a few people in this country, both to inquire and also to project an air of confidence and competence, which certainly exists in China. I think you have extremely good management teams in China. But the scope of the problem is just enormous. For years it has always been the assumption that if you drop below 7-percent growth in China, the country will be in trouble in terms of civil disturbances and they will not be able to hold it altogether. Now they're talking about 5.5-percent growth for next year in China. There was a three day meeting in the Politburo to consider this challenge. They have the capacity to re-stimulate, of course, because they have $2 trillion of reserves.

SPIEGEL: What about India, which has less room to maneuver?Wolfensohn: The mind of the public in India has been taken off the economics at the moment by the Pakistan confrontation. This does not diminish economic pressure but gets the population angry at the country next door. My biggest worry I think is the 53 countries in sub-Saharan Africa that have depended significantly on natural resource exports and where the prices in everything from iron ore to bauxite to oil have dropped hugely. And you do not yet have the internal market in sub-Saharan Africa. It produces maybe 1.5 percent of global GDP at the moment, with 800 to 900 million people, but by 2050 it'll be 2 billion people.

SPIEGEL: Do you expect a human crisis on top of the financial crisis?Wolfensohn: Well, the best estimates put out by the World Bank, and they've drawn on other research, is that by 2050 the average per capita income in sub-Saharan Africa, in today's dollars, will grow from $700 per capita to $1,700 per capita. In China and India, in 2050 the per capita income will be above $40,000 per capita, and in Germany and the United States it will be $98,000 per capita. So you have this enormous gap between Africa and the rest of the world.

SPIEGEL: Do you expect an anti-American mood as a fallout of this crisis?Wolfensohn: What has surprised me is that we had a $100 billion forgiveness of African debt done largely by the Europeans and by the Americans significantly. So far as I know, there has been no thank you for that. And immediately China and India come in, China with a $10 billion program and India with a much smaller program but a visible program. Three years ago, if you remember, the African leaders went first to Beijing and the African businessmen went to New Delhi. And at the same time as all the debts were being forgiven, they're claiming that their new best friends are the Chinese and the Indians, who are pushing also to build political relationships between the East and Africa as well as access to natural resources. And so you see this new dimension, but the amount of money which they're putting up is still significantly less than what the West is doing and what western NGO's do. But we're losing the battle down there because the Chinese and the Indians are just better at it. They're better publicists, they are building the president's homes, soccer stadiums, they're building roads and hospitals and you now have 750,000 Chinese living in sub-Saharan Africa.

SPIEGEL: To contain the crisis there are numerous stimulus packages, rescue and bailout plans. The financial crisis is still not under control, though. What do you expect next?Wolfensohn: Well, I think you've got about $9 trillion of announced packages, from which about $3 trillion have been drawn down.

SPIEGEL: Worldwide or only in the US?Wolfensohn: Just the United States. We've got in addition to that $6 or 7 trillion in Europe and other parts of the world. What I expect is that we need to understand precisely what this is for. Governments cannot buy all the bad assets of banks because the shareholders have to suffer, and it's not the responsibility of government to go and bail out all the banks. They get nationalized typically before that with the shareholders wiped out.

SPIEGEL: Are governments taking the correct action?Wolfensohn: What they've done this time is what they did not do in the 30's. In the 1930's they did not provide liquidity to the banks, so the banks went under very quickly. This time, Ben Bernanke, the chairman of the Federal Reserve Bank, is an expert on that area -- it's what he did his thesis on -- and he has provided liquidity to the financial institutions. The government is trying in some elements, notably mortgages, to try and rewrite the mortgages, to stretch them out, to make them sustainable for individuals so that you neither have a human crisis in terms of housing nor a bank crisis. So all that seems reasonable, but if we were to have a crisis in credit card debt or a crisis in loans to industrial companies or loans between banks, it is not the responsibility or the authority of the federal government to come and bail out every financial institution. It was thought when they had the $700 billion package that the banks would re-stimulate, they would increase their lending. Quite the contrary happened. What the banks have done is to try and strengthen their capital ratios. And so every bank that I know in this country is looking inwards to try and see how they can strengthen the capital of the institution because what they're worried about is the next wave of disasters and bad debts.

SPIEGEL: You sound very skeptical. But is it not a good idea if banks ask their clients about their business plan and if they will be able to repay the loan?Wolfensohn: Even good companies that have previously had credit lines are being restrained because they have to pay back some of their credit lines because the banks are contracting. In that event, the good companies become more limited in what they can do. The companies that are marginal probably go under or are weakened, and the companies that are bad get nothing. So you have this downward pressure on economic activity as a result of very necessary conservativism on the part of the banks. Now President-elect Obama is trying to put a trillion dollars out there to re-stimulate economic activity. This is what was done by FDR during the period of reconstruction in this country, and it is what was done in your own country after the Depression -- governments have public works programs, to put people to work.

SPIEGEL: Will it work nowadays?Wolfensohn: Well, it will get some people to work, and it keeps them off the streets.

SPIEGEL: But will it be a sustainable business model for all countries?Wolfensohn: I personally am not smart enough to know how long it will take for confidence to return, both to the consumer, which is what is necessary, and then to the companies.

SPIEGEL: Can one buy trust in the market?Wolfensohn: No.

SPIEGEL: But that's what governments are trying to do.Wolfensohn: You create a situation where you can rebuild a certain measure of trust. It's easier to do that with 8 percent unemployment than with 12 or 13 percent unemployment.

SPIEGEL: Everybody in the United States is talking about Obama taking taxpayers' money. But isn't it foreign money -- Chinese money, Indian money?Wolfensohn: He is not going to be able to raise a trillion dollars in extra taxes. But it's very conceivable that the federal deficit will move from $11 trillion to $12 trillion or maybe more.

SPIEGEL: The Fed is said to be determined to print as much money as needed to stimulate the US economy.Wolfensohn: I saw that headline in The New York Times, and I hope that no one said it. There is a very good financial team coming in. Tim Geithner as secretary of the Treasury is first rate, Larry Summers in the White House is first rate. You've got Paul Volcker who was my partner, in a sort of advisory capacity with a bunch of other people. Everybody that has got anything to contribute intellectually is around and ready to help. But it's not just an intellectual game. It is a game that is now being played out at a level of uncertainty that we've not seen since the 30's. This is not another adjustment as we had in the 80's. This is a shift in the earth. This is an earthquake. It is not a tremor.

SPIEGEL: How long is it going to take to get out of this mess?Wolfensohn: I don't think anybody knows, frankly.

SPIEGEL: And there's no alternative to the government's attempt to do everything which might be helpful in order to solve this crisis?Wolfensohn: No. To the extent that private sector will do it, the government would be thrilled, and I'm sure that they will come up with every conceivable incentive to individuals to spend and to the private sector to grow because that's the nature of American capitalism.

SPIEGEL: Are you confident that Obama is the right president in this period of time?Wolfensohn: First of all, I don't think any single man could do this whole thing, and so you have to look at the cabinet that he's put together, and I think his choices have been, from what I can see, very admirable.

SPIEGEL: But he's the one who has to make the decisions after all.Wolfensohn: He does, and that is a challenge that he faces, and the reason he was elected is because people think he has the balance and the judgment to do it. Just as John F. Kennedy was elected at a young age, and I think in retrospect people would say to his period as president he performed pretty well.

SPIEGEL: Will a new form of capitalism arise when the crisis is over?Wolfensohn: I would hope that we come out of this with a free enterprise system continuing without a lot of trade barriers and with a more enlightened government in terms of control of excesses. That will work for a while, and then there'll be some other set of excesses which hits the next generation, and that's the way it works.

Vice President Dick Cheney says that his boss, President George W. Bush, has no need to apologize to the American people for not doing more to head off the financial calamity, saying no one saw the crisis coming. During an interview Thursday with The Associated Press in his West Wing office, Cheney defended the administration's performance on an economy that is growing weaker daily and which recently collapsed in spectacular fashion. Cheney said that "nobody anywhere was smart enough to figure it out." He said Bush doesn't need to apologize because he has taken "bold, aggressive action."

Klugman and Rubeninny are both administration/government apologists.But, here's a first: Mish has just called an unofficial Depression.

"There is no official definition of depression. Here is mine. When the U-6 unemployment rate rises above 12.5 in conjunction with a stock market that is down close to 50%, it's an economic depression. We are in one." (Mike Shedlock MISH'SGlobal Economic Trend Analysis.)

If I may be so bold, a request for Illargi. I and many others are big fans of your commentaries. I know you are a busy guy but I always enjoy when you post a small remark [ cynical,funny or otherwise] at the beginning of a article. Thanks for all your diligence and hard work.

Ilargi said: This one is simple: everyone who buys a home with a mortgage these days is a flaming basketcase. Home prices have much much further to fall. Rent!

Question: Ok what would you suggest . I live in an area in western NY which hasn't seen much of this housing bubble. I put 20% down on a $175000 home in March 2003, 6% loan. I'm pretty sure I'm safe at my job and I was thinking of a 15 year refi. I'm 50 years old, divorced, 1 child lives with her mom (we get along great, rare but true)....This home sits on 1 acre, which will support a huge garden and I would live here until they carried me out.Totally debt free other than the house, but do pay child support...I'm struggling on what to do...any advice would be welcome. I'm also addicted to this blog, thanks!!

To anon yesterday whose spouse says the Gov't would never purposely turn off the electricity. Well, the gov't of Russia just turned off the gas affecting millions in 16 countries.Also who owns and physically controls the electrical grid? Lots of private enterprise control there and we now know how ruthless private enterprise can be.Your spouse sounds like a good man whose refuses to believe the worse. Its wake up from the dream for all of us.

Its crystal clear, really.Two full years...he's become an intellectual prostitute.They got to him too.Anyone that reaches that level of media-exposure will have to shut up or be initiated into the system of oligarchical collectivism, after which there can be no public honesty, only double happy-speak.

It's very easy to ascribe some diabolically sinister overall master plan guided by evil master minds, but the problem with that is.... well, these guys simply are not master minds. I have had the misfortune to read some of these guy's musings and official publications, and they are, more or less, from top to bottom, exactly as Kenneth describes.

I see them more as parasites or insects that simply know how to take advantage of circumstances (like a tick, that knows to drop from a branch when heat is detected below), and have just enough foresight to formulate vague plans which at times work, at others fail miserably.

For example, the Bush group had a vague antigovernment plan to basically destroy the ability of the government to govern, but this wasn't coupled with any work of genious, it was just putting in willing and soulless accomplices wherever they could, in Amtrack, in Fema, but these guys were just sort of flunkies following other vague ideas.

None of the Bush group ever showed any ability to do anything substantial, successful, or well thought out in the private sector, so I don't see how anyone can believe they magically became able to guide and generate long term successful plans while in office.

Kenneth's points yesterday qualify for the principle of what's called Occam's razor, the simplest explanation, the most realistic one, available for the given observations.

Their mediocrity goes across party lines, I had the, again, misfortune to read a book by Rubin, recent, can't remember the name, maybe 2006, and he blathered on about how great the 'ownership society' is, despite the 'flaws and errors' of the current Bush group, you know, the society where we put all our assets into finite investment vehicles like stocks or houses, then believe the immediate price spikes actually mean there's now value created, instead of just plain too much demand for the investment item.

I use Rubin as an example here because unlike the Republicans, who are largely totally incapable of generating any rational arguments whatsoever, and who generally follow the much cruder authoritarian models (you know, suck up, kick down) that guys like John Dean and his almost co-author Barry Goldwater (yes, that Barry), warned against in Conservatives without Conscience, anyway, unlike those thugs, Rubin can construct whole sentences, but even he was bought into the casino mindset.

But Rubin, like all these guys, lives and works in a protected, isolated world (I think he taught at UC Berkeley when he wrote that book. Berkeley is sort of a liberal little mecha where if you don't want to deal with the world, you just buy a nice house up on the hills, drive down to the nice wooded and bestreamed campus, teach your nice cherry picked group of upper class students, and then go home and write about how great our society really is. Great for guys like him, that is.

I think of guys more like Mr. Mortgage, who, if you amplify him, minus about 20 points in IQ and common sense, by thousands, largely formed I believe most bankers, lenders, finance types, then throw in a corrupted Ivy league educated group, that has grown into a radical sense of entitlement because they were separated from the larger social body since essentially birth, in isolated upper class/ rich schools and enclaves.

yada yada... anyway, and then sprinkle this mix with a few here and there who actually do engage in true criminal collusion and conspiracy of the more classic types, like Enron, and I'm sure many of the larger Wall Street firms.

But what I don't give anyone of these groups credit for is being able to engage in meaningful long term conspiracies of the types some people like to believe in, I simply do not think their world views would permit such a thing, they are all too greedy and self centered, power hungry, etc, to ever be able to do that.

Correction on my last post...I purchased in March of 2006, not 2003....Also can Zillow be trusted for home prices? According to them my house is now worth $200,000, up from 175,000...just seems too high, but as I said the bubble here was never that big, so....???

By the way, by far the best analysis of what actually drives and motivates these parasites I found in the oddest of places, C.S. Lewis's 'That Hideous Strength'.

I'm not exactly clear how he managed to so perfectly capture the utter emptiness and futility of the crawling for some never to be achieved position, status, wealth, etc. from his position of being a teacher in Oxford, but manage it he did, he put his finger about as perfectly as I've seen in any work before or since on what actually motivates and drives these guys.

It's not a book that will ever win any literary prizes, and some might be annoyed by his Christian framing of the thing, but I just ignore that part, the overall picture is what I find so remarkably astute and accurate.

I thought I'd post a link to an article containing a lot of wisdom on healthcare today. I have thought a lot about where healthcare in the US is headed, and because of the complexity and out of control excesses in the current system I can't envision any outcome other than a sytemic failure down the road as the economic crisis evolves. I know everyone here is concerned about trying to use local and personal responsibility solutions and this says it all when it comes to healthcare.

Maybe the definition of depression should be: a situation where you can only grow the economy by shrinking industrial output, or population relative to output.

The economy grows so massive as to crush the biosphere and resource base and deplete all energy reserves before they can be substituted, so that increasing industrial output has negative marginal gains, and contracts the flows of money and energy.

Obama's deceptive new concept of sustainable "growth", or long-term "growth", has only the substitution of energy sources as a validargument.Both medical expansion and education is related to food surplus, primary industrial activity and energy, which will collapse.

Growth in any valid sense can now only be achieved by massively contracting the industries that produce things we don't need, while decreasing the global population relative to food and energy production.

Interesting comment on health care. I've also been very interested in it lately.

I've been ill with recurring upper respiratory infections for the past 3 months!

The dr. prescribes meds that should be the best for the symptoms, but when I get to the pharmacy the insurance company has changed the prescription to a different (cheaper and less effective medicine). 70% of the prescriptions I fill aren't for the medication the dr wanted.

Thoughts in the Presence of Fearby Wendell BerryWeb exclusive to the Autumn 2001 issue of Orion magazine

I. The time will soon come when we will not be able to remember the horrors of September 11 without remembering also the unquestioning technological and economic optimism that ended on that day.

II. This optimism rested on the proposition that we were living in a “new world order” and a “new economy” that would “grow” on and on, bringing a prosperity of which every new increment would be “unprecedented”.

III. The dominant politicians, corporate officers, and investors who believed this proposition did not acknowledge that the prosperity was limited to a tiny percent of the world’s people, and to an ever smaller number of people even in the United States; that it was founded upon the oppressive labor of poor people all over the world; and that its ecological costs increasingly threatened all life, including the lives of the supposedly prosperous.

IV. The “developed” nations had given to the “free market” the status of a god, and were sacrificing to it their farmers, farmlands, and communities, their forests, wetlands, and prairies, their ecosystems and watersheds. They had accepted universal pollution and global warming as normal costs of doing business.

V. There was, as a consequence, a growing worldwide effort on behalf of economic decentralization, economic justice, and ecological responsibility. We must recognize that the events of September 11 make this effort more necessary than ever. We citizens of the industrial countries must continue the labor of self-criticism and self-correction. We must recognize our mistakes.

VI. The paramount doctrine of the economic and technological euphoria of recent decades has been that everything depends on innovation. It was understood as desirable, and even necessary, that we should go on and on from one technological innovation to the next, which would cause the economy to “grow” and make everything better and better. This of course implied at every point a hatred of the past, of all things inherited and free. All things superseded in our progress of innovations, whatever their value might have been, were discounted as of no value at all.

VII. We did not anticipate anything like what has now happened. We did not foresee that all our sequence of innovations might be at once overridden by a greater one: the invention of a new kind of war that would turn our previous innovations against us, discovering and exploiting the debits and the dangers that we had ignored. We never considered the possibility that we might be trapped in the webwork of communication and transport that was supposed to make us free.

VIII. Nor did we foresee that the weaponry and the war science that we marketed and taught to the world would become available, not just to recognized national governments, which possess so uncannily the power to legitimate large-scale violence, but also to “rogue nations”, dissident or fanatical groups and individuals - whose violence, though never worse than that of nations, is judged by the nations to be illegitimate.

IX. We had accepted uncritically the belief that technology is only good; that it cannot serve evil as well as good; that it cannot serve our enemies as well as ourselves; that it cannot be used to destroy what is good, including our homelands and our lives.

X. We had accepted too the corollary belief that an economy (either as a money economy or as a life-support system) that is global in extent, technologically complex, and centralized is invulnerable to terrorism, sabotage, or war, and that it is protectable by “national defense”

XI. We now have a clear, inescapable choice that we must make. We can continue to promote a global economic system of unlimited “free trade” among corporations, held together by long and highly vulnerable lines of communication and supply, but now recognizing that such a system will have to be protected by a hugely expensive police force that will be worldwide, whether maintained by one nation or several or all, and that such a police force will be effective precisely to the extent that it oversways the freedom and privacy of the citizens of every nation.

XII. Or we can promote a decentralized world economy which would have the aim of assuring to every nation and region a local self-sufficiency in life-supporting goods. This would not eliminate international trade, but it would tend toward a trade in surpluses after local needs had been met.

XIII. One of the gravest dangers to us now, second only to further terrorist attacks against our people, is that we will attempt to go on as before with the corporate program of global “free trade”, whatever the cost in freedom and civil rights, without self-questioning or self-criticism or public debate.

XIV. This is why the substitution of rhetoric for thought, always a temptation in a national crisis, must be resisted by officials and citizens alike. It is hard for ordinary citizens to know what is actually happening in Washington in a time of such great trouble; for all we know, serious and difficult thought may be taking place there. But the talk that we are hearing from politicians, bureaucrats, and commentators has so far tended to reduce the complex problems now facing us to issues of unity, security, normality, and retaliation.

XV. National self-righteousness, like personal self-righteousness, is a mistake. It is misleading. It is a sign of weakness. Any war that we may make now against terrorism will come as a new installment in a history of war in which we have fully participated. We are not innocent of making war against civilian populations. The modern doctrine of such warfare was set forth and enacted by General William Tecumseh Sherman, who held that a civilian population could be declared guilty and rightly subjected to military punishment. We have never repudiated that doctrine.

XVI. It is a mistake also - as events since September 11 have shown - to suppose that a government can promote and participate in a global economy and at the same time act exclusively in its own interest by abrogating its international treaties and standing apart from international cooperation on moral issues.

XVII. And surely, in our country, under our Constitution, it is a fundamental error to suppose that any crisis or emergency can justify any form of political oppression. Since September 11, far too many public voices have presumed to “speak for us” in saying that Americans will gladly accept a reduction of freedom in exchange for greater “security”. Some would, maybe. But some others would accept a reduction in security (and in global trade) far more willingly than they would accept any abridgement of our Constitutional rights.

XVIII. In a time such as this, when we have been seriously and most cruelly hurt by those who hate us, and when we must consider ourselves to be gravely threatened by those same people, it is hard to speak of the ways of peace and to remember that Christ enjoined us to love our enemies, but this is no less necessary for being difficult.

XIX. Even now we dare not forget that since the attack of Pearl Harbor - to which the present attack has been often and not usefully compared - we humans have suffered an almost uninterrupted sequence of wars, none of which has brought peace or made us more peaceable.

XX. The aim and result of war necessarily is not peace but victory, and any victory won by violence necessarily justifies the violence that won it and leads to further violence. If we are serious about innovation, must we not conclude that we need something new to replace our perpetual “war to end war?”

XXI. What leads to peace is not violence but peaceableness, which is not passivity, but an alert, informed, practiced, and active state of being. We should recognize that while we have extravagantly subsidized the means of war, we have almost totally neglected the ways of peaceableness. We have, for example, several national military academies, but not one peace academy. We have ignored the teachings and the examples of Christ, Gandhi, Martin Luther King, and other peaceable leaders. And here we have an inescapable duty to notice also that war is profitable, whereas the means of peaceableness, being cheap or free, make no money.

XXII. The key to peaceableness is continuous practice. It is wrong to suppose that we can exploit and impoverish the poorer countries, while arming them and instructing them in the newest means of war, and then reasonably expect them to be peaceable.

XXIII. We must not again allow public emotion or the public media to caricature our enemies. If our enemies are now to be some nations of Islam, then we should undertake to know those enemies. Our schools should begin to teach the histories, cultures, arts, and language of the Islamic nations. And our leaders should have the humility and the wisdom to ask the reasons some of those people have for hating us.

XXIV. Starting with the economies of food and farming, we should promote at home, and encourage abroad, the ideal of local self-sufficiency. We should recognize that this is the surest, the safest, and the cheapest way for the world to live. We should not countenance the loss or destruction of any local capacity to produce necessary goods

XXV. We should reconsider and renew and extend our efforts to protect the natural foundations of the human economy: soil, water, and air. We should protect every intact ecosystem and watershed that we have left, and begin restoration of those that have been damaged.

XXVI. The complexity of our present trouble suggests as never before that we need to change our present concept of education. Education is not properly an industry, and its proper use is not to serve industries, either by job-training or by industry-subsidized research. It’s proper use is to enable citizens to live lives that are economically, politically, socially, and culturally responsible. This cannot be done by gathering or “accessing” what we now call “information” - which is to say facts without context and therefore without priority. A proper education enables young people to put their lives in order, which means knowing what things are more important than other things; it means putting first things first.

XXVII. The first thing we must begin to teach our children (and learn ourselves) is that we cannot spend and consume endlessly. We have got to learn to save and conserve. We do need a “new economy”, but one that is founded on thrift and care, on saving and conserving, not on excess and waste. An economy based on waste is inherently and hopelessly violent, and war is its inevitable by-product. We need a peaceable economy.

Come on, do we really need to be told that eating right , exercise, not smoking is good for us?...I'm VERY wary when I see the word "alternative" preceding medicine. And Chopra is a hoping that the invisible "man in the sky" will help all of us, if we believe hard enough.Maybe they should have Jenny McCarthy head this, after all her life's mission is to rid the world of vaccines that she believes, through her mastery of "the google", caused her sons autism...

Stick with "real" science and medicine, eat right, exercise and all will be fine. And don't forget to always be skeptical..

In cosmology, they use this model of symmetry-breaking to explore the first moments of the universe, and how the four fundamental interactions of physics came to be.Firstly, Gravity emerged from the unified field, in the so called quantum gravity era, for the reason that it is a convenient recursive algorithm.

Then, the strong nuclear force became distinct from the electroweak force, in the inflationary epoch.

And finally, the electroweak force broke apart into the weak nuclear force and the electromagnetic force. Then there was ionisation and re-ionisation, and some anti-matter was dissolved along the way.

The speed of light is now apparently a universal constant at 299.792.458 meters/second in vacuum. (186.000 miles/second)

Because of this, there must be local variables in the observable speed of radiometric decay of nuclei between observers moving at relative speeds, probably causing the phenomenon of time-dilation and length-contradiction in massive bodies at relativistic speeds.Otherwise, no thermodynamically coherent systems could move relative to one another. (at different speeds)

I reckon all thermodynamic interactions involving wave-function collapse, yielding the discipline of gravito-biology,and therefore forming memory and self-replicating heuristic molecules,"life", can only proceed in the gravity of an expanding universe.

All these thermodynamic systems are embedded in a gravitational field,forming a continuum of locally quantized time bubbles, local gravity dictates the interactions between them cannot be fully dissolved.When we send a massive particle through an accelerator, increasing its velocity, its mass also increases. This might be a phenomenon only caused by an expanding universe.

Cosmological red-shift of electromagnetic waves may only be a local phenomenon in our observable universe with a radius of fifteen billion (light) years.

The waves from the sun take about eight (light) minutes to get here,causing the sun that emitted them to exist eight minutes in the past.There is no sun in our present, it exists in a pocket of time eight minutes in the future. The present is a local phenomenon that exists only here on the planets surface.

Consciousness obviously exists slightly in the future, maybe with a minimum differential of 10^-12 seconds ahead of the present, pulling the physical present towards it, the mind in gravity, and perhaps accelerating the observable expansion of the universe, otherwise we could make no percievable choices in the present, and there are certainly no choices to be made in the past.

Perhaps if we sent a probe with entangled photons in some kind of measurement apparatus into deep space, into the past, with those same photons on earth to relay live information beyond the speed of light, this would be amusing.

You could say all cosmic events before the dawn of electromagnetism had a combined duration of 10^-12 seconds, but this is contradictory. Because the passage of time can only be gauged relatively to the speed of light, the concept of time is completely dissolveable before the last symmetry-breaking.

Also, as long as there are electromagnetic waves propagating through a gravitational continuum,the value of the mathematical constant Pi(3,14159265...) is not absolute. The amount of decimals are not only infinite and the pattern transcendental, if it was calculated beyond a certain resolution, maybe the 10^100-th decimal place, the decimals would fluctuate and yield different outcomes at every calculation. (perhaps revealing interesting patterns concerning the other mathematical constants)Proveable hypothesis, maybe.

In conclusion, The violent contraction of the global economy could decrease the relative value of Pi as calculated,and slow the expansion of the universe-bubble.How to cut a shrinking pie?

Ive purchased a home mid last yr. where i live the monthly cost is the same as renting and I get a tax deduction and equity building. rents havent fallen at all where I live (Cary NC)in fact were rising which is why we bought.

I put as little down as possible(3%).. If I lose it to foreclosure Ill rent. I agree that paying cash for a house is foolish but if you have little skin in the game and can own for rent costs, why not?

I must have your entire recipe for zanahorias en escabeche! I don't know if you caught the carrot/mule adage above, but what timing.

I agree that most are sleds and door-turners in gummnt, who while perhaps being compromised here and there can pursue no clear agenda for better or worse.

Then there are the few, and I've seen it. Growing up in Park County Montana gave me an advantage in knowing of rabidly criminal bureaucrats, just for instance the time a long series of "insoluble" burglaries ultimately ended when someone caught the cops in action. They've sent a lot of people directly from desks to the pen.

These kind love to gather stupidity around themselves, so they have scapegoats galore. Usually the light will never shine beyond the legion scapegoats to the real criminals, and how much worse at the uppermost henchmen ('Oh Mr Kissinger, come out come out wherever you are').

So I both agree and disagree. But having seen a mere county attorney and sheriff work in tandem (OK and a few city councilmen, a county commissioner or two - these attracted to a magnificent real estate bubble...), I guarantee you they can pull off yet more from the national/"global" level!

Alex:"Stick with "real" science and medicine, eat right, exercise and all will be fine. And don't forget to always be skeptical.."

That's right. Don't forget to be skeptical. If you really believe in science then you should not believe vaccines are anything other than a great source of revenue. I know doctors who support vaccination and those who oppose it. The difference between them is that those who support it refuse to look at anything other than industry propaganda. Sanitation, food and clean water are the main reason for improved longevity over the last century or so.

Yup, gaming the banks which gamed us and screwed the school teachers in Lapland.

Your logic is impeccable, except now that Cheney has established the precedent of wiping his carbuncular ass with the Constitution, it would not surprise me in the least if TPTB passed a retroactive, ex post facto law eliminating jingle mail and sticking mortgagees to the bitter end in this death spiral.

I practice Traditional Chinese Medicine (often thought of as acupuncture, though that is like calling M.D.'s pill pushers)(yes sometimes apt, though not necessarily complete.) I practice in Saint Louis, MO. This is not a wellspring of alternative medicine. My niche has developed as the treater of last resort. I get the very sick people that none of the western treatments have worked for. I am astounded by how rote the western medicine around me is practiced. But there is no tie in to the system. I have md's for patients, I teach (guest lecture) at Washington University's medical school and am open and wiling, but there is no institutional support for the idea. I chose TCM with the idea of being able to practice a local medicine that would continue without a grid. I wanted a job that could not be outsourced and could be tradeable and marketable no matter what happens. I figure my long term outlook is good. I have stockpiled two years worth of needles that I could stretch to four if I needed and have developed relationships with local herb producers. BUT the total acceptance in this area of TCM is so low that unless it has worked for them or a friend it is just "crazy". The more local we go the less of an issue that is, but till then it is a ride. As to the economics of all of this, I saw a strong decline last october while many of my patients decided if I was essential or not, then it returned to normal growth levels. Most of those I have cared for do send me their friends and loved ones because of how much it helped them, so much so they usually come to see me first for the next problem they have. This compares favorably with Yoga and Massage which I have under my roof as well, those have not fared as well, with both seeing declines in the last four months of over 50% and no rebound.

Spice, a good Licensed Acupuncturist can help with your lung infection, sometimes antibiotics are not enough, some problems just can't be killed away.

About thinking no gummnt would turn off services on purpose... think about that before you load.

They took everyone's gold in the 30s for crying out loud. They've got a worldwide goon squad engaged in "wars" (they finance both sides) whom they can dispatch where they will in case of "civil unrest."

Here is a link of Minn Gov Jesse Ventura arguing with (but for Jesse I'd never link him) Howard Stern about people's tragic incapacity to conceive of people being that evil... How Jewish friends still mourn those who remained in Germany, saying "it isn't so, it couldn't be that bad."

Re the suggestion that the UK gov't just buy the houses worth less than the mortgage...who sets the price? complicated in that the value changes month to month, region by region.If the previous owner becomes the rentor of said property the rent would need to be less than the mortgage payment that the owner failed to maintain. The gov't would then be responsible to pay rising( how much is an unknown) property taxes. Who has the data and skill to analyze that information accurately? Sounds like another black hole to me....

You, The hyena with polished face and bow tie, In the office of a billion dollar Corporation devoted to service; The vulture dripping with carrion, Carefully and carelessly robed in imported tweeds, Lecturing on the Age of Abundance; The jackal in double-breasted gabardine, Barking by remote control, In the United Nations; The vampire bat seated at the couch head, Notebook in hand, toying with his decerebrator; The autonomous, ambulatory cancer, The Superego in a thousand uniforms; You, the finger man of behemoth, The murderer of the young men.

Now that half of europe has a gas shortage, and the local industries affected have shut down, can we still accurately define how they would have contracted in this period?This is going to make it very difficult to define the speed of contraction that would have occured without russia's antics.

"uncertain said...Gravity, feel free to resist the urge to post poorly done metaphysics, remember Ilargi banned you? You were good for a while, but it seems you can't stop yourself. You should get your own blog site, then post such musings there, then, if you felt the need, you could simply post a link to your latest, and people can read it if they want.

aarroozz, same thing, please post links to full articles and don't clutter the comment threads with them."

Uncertain, I'm with you on both counts.

Gravity, stop babbling into outer space, and get your line spacing right. It''s not hard.

Aarozzzz, no need for lone posts like that.

Both of you, people are trying to get to understand things here, and you are keeping them from that. Be sociable human beings, stop the selfishness, please.

Thanks for your opinion/suggestions! What you suggest, for me, wouldn't work, without getting into too much detail... The ex and my daughter are in great financial shape,she owns the house free and clear and works for the local utility company as an engineer. Being a woman in her position almost guarantees she's safe at work,(underscore almost) plus she makes "good" money and is the poster child of frugality. (paid down the house in 10 years no debt, etc.) She saves 99% of all child support payments for my daughters future education. We have no set visitation nonsense and my daughter spends a lot of time with both of us, plus I stay over there a couple of nights a week and "put her on the bus", so the ex can go into work at 5am, to get her hours in...If anything I would move back in with them. (and would in a "crisis" situation)What I'm wrestling with is should I refi or not. Maybe I'm being too shortsighted? I've done a lot of reading on the last Great Depression, and yes 25% of Americans were unemployed, but 75% were employed and many actually thrived. Now of course I also understand that was then and this is now, and nobody knows for sure what the landscape will look like for the next 5,10, 20 years, but I have to believe there will be survivors. We all have to prepare for the inevitable future, everyone's situation is unique. I'm just looking to add to my knowledge so I can come to an educated, well thought out decision.

Ranger,He did not say it was a scam, anon said its primary purpose was to generate income. I am not anti vaccine, but there are two sides to the epidemiology interpretation. I am vaccinated. My kids are on a slow vaccination schedule for anything that would probably kill them that starts after the age of two. I don't rx vaccines for things not likely to kill you. I think developing true resistance is longer lasting and better in the long run. I kinda worried this is all off topic, but I have long thought of this debate as one that parallels the economic ones we discuss. Concepts of conservative medicine, truth, science. These terms don't necessarily mean to others what they mean to us.

Any reason Canada cannot 'refinance' our national debt interest free with the Bank of Canada? I read on the net that Gov dollars actually came interest free in just this fashion all the way from 38 to 74.

Would free up some dollars, I am tired of seeing the inevitable pie chart of gov spending showing 'interest on the debt' strangling all....

I wouldn't refi as that would turn what is probably a non-recourse loan into a recourse loan. The difference is that with a non-recourse loan, if you're foreclosed upon then the bank can take the house, but can't come after you for the difference between what you owed on it and what they managed to sell it for. With a recourse loan you'd be on the hook for the difference.

If you could cope with moving in with your ex as house-mates then that would probably be a good back up plan. Utility engineering jobs are more likely to be secure than most other forms of employment. People pooling resources is the way of the future. United we stand and divided we fall.

I have already chosen and informed my padrinos of their status and what they can expect. That is, people who aren't family but whom I have unilaterally promoted to that status, and whose children, if any, I would consider as my own, for purposes of providing housing, food, support, protection, etc.

We've done something similar here. Ilargi is part of my family as far as I'm concerned, and others who come here would be as well. Sharing is an essential part of the future.

In Finacial terms, "Depression" most definitely has a definition as does recession.

Acupuncture has many benefits and also suffers from the same diminishing effects as does modern western pharma chemicals when used on a continual basis.

TPTB are evil and do things with purpose. The think tanks they employ, the control they wield, isn't by accident. Debt slavery and usury isn't a modern phenomenon, and the usual suspects are, well, usual, your belief in this statement of fact isn't required, as not believing in gravity will not diminish its effects if you jump off a tall building without a parachute.

Rent or buy ?....someone owns the building you rent, if you go the rent, route.You would own the building if you buy it and then you control if or how much rent you would charge if you, or if you didn't rent it.

Healthcare in USA is broken. The "Best" hospitals need only shuffle over the bar, its been set so low, jumping isn't required, even MD's fear dying needlessly in the system, telling everyone your a MD when being admitted isn't going to save you either. When the system is this broke, being the pilot of the airliner makes no difference when the jet splashes into the H2O.

Predictions are simple and fool proof, just predict doom and gloom. Try and find an era where doom and gloom werent abundant in spades. Every time in mans history is replete with hardships and suffering, some people collectivley try and monopolise the "victim status" and claim they suffer more than anyone else, these people usually are the cause of most others sufferings.

As usual,I have a sour taste in my mouth from realizing the truth in the articles woven together by our hosts.I am trying to see some light,but its becoming clearer there will be little light in this tunnel for a long time.That said,my work continues on my liferaft.Extra-special effort to try and get the taxes back asap...too many things to do that need money.

Work in my field has slowed to a crawl.The layoffs have started at my company.I have not seen a 40 hr week in 6 weeks.I do not know how much longer they can keep this whole crew on...The company prez has told me not to worry.But as I get older,worrying comes easier.

With a bit of luck,I will winter the 30 hives,and add 50 more to them this year.It will cost like 4 grand,but I can not think of a better "anchor" for my table at the farmers market than honey+ whatever I succeed in growing,or producing .A successful year with bees will give me enough hive material to begin in the commercial pollination biz.The goal is 300 hives with 200 available for pollination in the almonds,apples and {hopefully}seed crop pollination .Being a "sideliner"will keep a useful small bizness going even if I just sell honey,and what my trees/garden/greenhouses grow.

KennethYou left out the FDA who had a recent tattle tale speak of the corruption from within, otherwise it was a very good list. Alex-I hope you read the part of the article that dealt with where our 16.5% GDP economic resources are being devoured in our system. In case you didn't, here: Our "health-care system" is primarily a disease-care system. Last year, $2.1 trillion was spent in the U.S. on medical care, or 16.5% of the gross national product. Of these trillions, 95 cents of every dollar was spent to treat disease after it had already occurred. At least 75% of these costs were spent on treating chronic diseases, such as heart disease and diabetes, that are preventable or even reversible.YD-Thanks for your interesting post. I think that you will do well if and when our western system breaks down. A

My wife is a practising Homeopath. She has studied different sides and believes it all has a place.

Vaccines DO work and yes there is a price for some people (fatal and brain damaging reactions).

Unfortunately all sides have been hurt; Alternative medicine has it's charlatans and Allopathy (Western Medicine) is heavily influenced by big pharma and there is a focus on treating the symptoms rather than the whole person.

I always shake my head about many US commentators on their health 'system'.

Amazingly most of the rest of the developed world manages to get better health at a far cheraper cost (in both $ or GDP %).

Comments by some (mostly US MSM) about how the US 'cannot' afford an improved, full coverage, health system are being, at best, disingenious.

The converse is true, the US cannot afford to NOT have such a system. There are many models to choose from (UK, French, Canadian, Germany, Austrlia, Japan, etc) but they all seem to do the job .. and at a fraction of the cost.

Moving into a much poorer world, bang for a buck in critical infrastructure systems (and there are none much more critical than health) is going to be crucial in maintaining any sort of civil society. Morever, finding spare resources for investment purposes in the future is going to depend on getting savings from high recurring expenditure areas.

Getting US health expenditure down to (say) the German/Canadian levels, frees up a couple of points of GDP expenditure that can moved into increasingly necessary investment (e.g. energy and transport) - basically shifting the balance sheet.

The capital limited future is going to be about everyone (States, companies, individuals, etc) managing recurring expenditure very very carefully to make capital investment possible at all.

dancing in the rain, kenneth and others... I would just like to add a few thoughts.

I used to be much more sympathetic to the excuse of incompetence over conspiracy theory. Instead, I find myself discounting such claims more and more.

As the mother of teenagers, I can conceivably imagine an attempted argument of both "I know, I know" while responding, "I dunno..." when the consequences appear but is it a legitimate legal defense for anybody?

If we collectively decide that it is, I suggest we need more than mere pitchforks to collect the mature.

I believe both conscious and unconscious conspiracies create much of the oppression facing the bulk of the population. The mind sets of everybody involved dictate both the rational and irrational responses to events. If we enact such and such a legislation, then such and such will follow (sooner or later no matter). If we polarize a population using racist and religious propaganda, then we can expect to see rises in hate crimes, fundamentalist intolerance.

Are there people in power capable of Grand Economic Strategy? Hell yes. Just what is the CIA? What was the communist threat? How did Russia fall then? Of course, there are those who deliberately conspire to influence world events. The trick is either win and write the history books or do it surreptitiously.

Beyond that, there are the mindsets that reinforce the status quo. This is the sheeple-ization. Those in power have their mindsets, as do those oppressed and (if there is) anyone left. Institutions are structured to reflect those mindsets, which in turn reinforce them.

Sorry, if this is not the most eloquent rebuttal but that excuse just doesn't cut it for me anymore... not when the US has lost its separation of governmental powers, civil liberty guarantees and now economic sovereignty.

Let's put this anti-vaccine nonsense to rest, shall we? In our modern safe complacency, we forget what it was like when childhood diseases were an annual scourge, when terrible afflictions like polio stalked the land, when people were afraid to let their children out of the house, when families were quarantined and individuals, often children, died or were paralyzed and disabled for life, sometimes ending up in iron lungs. I suspect most people who rail against vaccines are too young to know what that was like. I'm not. I had polio during the last epidemic and nearly died from it. It is the very success of modern vaccines that have allowed you the luxury of avoiding that reality and to fantasize that it is all a great conspiracy. Easy to take it all for granted now. Wait until we find ourselves in a Kunstlerian future where everything has fallen apart and there is no more capacity to produce vaccines. Then you will realize how fortunate we have been to have benefited from this advance in medical science.

I'm with you on the vaccine issue. My mother-in-law was not vaccinated against rubella and her fourth child was born blind as a result. This same child was himself not vaccinated against whooping cough, which he caught as a baby and suffered from for a year. For that whole time he never managed to sleep for more than an hour at a time, and neither did his mother. At the end of that year he weighed less than he had at the beginning and was severely brain-damaged (compounding the effects of rubella damage). He's now about 50 with a mental age of about 4.

All my kids were vaccinated and none have suffered as a result. Although vaccines can cause damage, the risk is very small. The risk of damage due to the diseases themselves is higher.

You commented a couple of days ago that there was an odd contrast between pointing out corruption and yet analyzing markets. There is indeed contrast there, of Ilargi's style/POV and mine. Ilargi would say the beggaring of the US has been deliberate, whereas I tend to see the mania we have lived through as a period of mass delusion as to the reality of risk.

I would say the goals of the elite are fairly short-term - to enrich themselves and secure personal advantage, and if everyone else is doing it too then they can rationalize that it can't be that bad. I don't think they saw years ago where it would end up, although some of them do now no doubt (but dare not say so for fear of precipitating a panic).

On the issue of analyzing markets scientifically, my view of markets is quite different from most people who would think that markets are scientific. The prevailing view is that markets are a rational and objective resource allocation mechanism, but I would say that nothing could be further from the truth. I analyze markets on the basis human herding behaviour, looking for fractal patterns in extremes of emotion (greed versus fear). Corruption is very much a part of the model, as are all other human frailties, because markets are human systems.

The chances of me ever foreclosing are slim to none, but of course I can't say for sure 100%. Let's just say I'm confident they will carry me out of this house feet first. Thanks for your input, I will continue to research and ponder my options....

Kenneth, you right about the ex, she does "sound" like the perfect woman, but did I mention she has 2 heads, but you know what they say.....8^)

Anom@ 7:38Please don't take any offense but I rank homeopathy right there next to "intelligent" design, young earth creationism, voodoo, 9/11 conspiracy theorists, not to mention psychics, mind readers, spoon benders and snake oil salesmen.... but of course that's just my opinion. What do I know, I'm just a guy on the "internets"....

Like I said alternative has it Charlatans.... but Like Acupuncture, Naturopathy, Chiropractic and Alopathy, Homeopathic medicine has it's place. A true homeopath studies anatomy, physiology, pathology just like an MD. To compare it to Voodoo indicates ignorance.

"I analyze markets on the basis human herding behaviour, looking for fractal patterns in extremes of emotion (greed versus fear). Corruption is very much a part of the model, as are all other human frailties, because markets are human systems."

Do you by chance follow Benoit Mandelbrot or have you read the book he wrote on finance, Fractals and Scaling in Finance: Discontinuity, Concentration, Risk. He has influenced Nassim Taleb as I'm sure you know. Since I'm a "rookie" in all of this,I'm trying to research and learn. I found this interview with both of them very interesting. Taleb & Mendelbrot

Alex, you commented that in the great Depression 75% of people were employed {because so many people escaped to farms, I think that figure is very cooked, but nevertheless} and that indeed many thrived.For my information {please help me save time} where did you find that fact, what percentage is "many" and what were they doing that allowed them to thrive?Thank you in advance, and would you be so kind as to place the reply {if there is one} in the January 10 comments, as I will likely not be reading under January 9 after this.

Planes crosshatch the sky, and within hours it is covered by artificial clouds. You can watch the trails expand, interlace, and twine together into what look most like cirrus clouds. Then those masses fan out to cover and obscure the sky.

It's been going on for two days, the Chemtrails. It's quite obvious if you hike into the hills as we've done, and watch it occur over an hour or two. Just like the link above, only yesterday and today, worse.

It first happened in great measure the Monday following the G20 meeting in November. When they were done after a couple of days, it looked like Guadalajara or Mexico City sat behind every spot on the horizon, the sky was so filthy.

But we've lived here for two years and we know better. We know how the sky and environment look and behave. This is entirely artificial.

You can watch the planes crosshatch the sky, over and over, and build up these clouds.

Like smoke it hangs in the air, slowly settling, dissipating over a couple of days, and a few days later it happened again. This, after a lull of over a month or so since the post-G20 attack, which was concentrated over the major cities.

We saw it as we drove cross-country. The fallout from the sky was so thick, little boys clustered at intersections of Aguascalientes to wash windshields.

When a plane flew over our block, the windshield was sprayed with miniscule nubs of something like a clear glue.

I have had the impression of losing my eyesight. The filmy crap just hangs over everything. Then after flushing my eyes with water, the eyesight is clear again.

We both feel quite sleepy, and less keen of wit.

We're going to be moving out of here shortly if it doesn't let up, going on the road to wherever it's different.

This is what they call "unconventional warfare." It involves this too. According to what we've read, the predominant hypothesis is that the two (HAARP and Chemtrails) somehow work together on whatever effect.

Dr J and Stoneleigh,I agree that vaccines are one of modern medicine's most powerful tools. I did not agree with that part of Kenneth's statement. You both cite excellent real life examples of why. Nor, was there any anti-vaccine rhetoric in the article I linked. Plus they are a perfect example of preventative medicine, the point of the article. As for autism, there was a recent report which was interesting concerning a genetic tug of war between the parents sets of genes that was quite fascinating:In a Novel Theory of Mental Disorders, Parents’ Genes Are in CompetitionSorry to get off topic, and I don't wish to further a debate on autism/vaccines.A

I have not heard anybody on this board condemn vaccines. Someone may have but if so, I missed it. What I have heard is concern. How valid are those concerns? I can't honestly say. I know what has made my wife nervous is the condescension towards even asking questions. "How dare you question the science!" "We know better so do as we say." and so no and so on. How is this different than the economic paternalism this site mocks daily. More than mocks, righteously points out as a failed solution to what ails us. This is a solution that does not work when information flows as it does today. The only option is to go whole hog and address those questions. The willingness to address those questions would make me more confident at least about the solution. The other aspect is the solution for smallpox or polio may not be the solution for chicken pox and genital warts.

The facts were much more mundane, something with engines burning much hotter now, you know, energy efficiency and all that... leaving those vapor trails.

Why is the internet so rotten about allowing myths and urban legends to propagate even more quickly than they used to?

Before you fall for this stuff, take some time off of here, fire up google, and start searching, but search for people debunking, then search for the people who started the things, then see if you can find financial motivations.

In every case I've done this I've found what I was looking for.

Re other topics, I wouldn't lump in an ancient, scientifically established medical practice like acupuncture, which is proven, and can be shown to work by just getting it done to you by a qualified practitioner, with homeopathy. No comment on homeopathy beyond that since it's not on topic.

The internet has really made a lot of myths build incredibly fast, but what's odd is, the will to use it to disprove them, which I find usually takes about 1 minute at most of concentrated searching (chemtrails took more time, that guy is a sneaky little bastard) seems oddly absent.

There are charlatans in in every form of medicine including Acupuncture, Chiropractic,Herbalism, Homeopathy, Naturopathy,Neural therapy,Osteopathy and Traditional Western medicine. But herein lies the problem, these are all forms of Pseudoscience, with the exception of western medicine. You see the problem with alternative medicine is that it doesn't work,and the greater problem is it may cause death or serious injury as a result of stopping a particular drug therapy. People many times turn to alternative medicine when they're desperate or terminally ill as a last resort, and I can't think of one case where this has worked. If anyone can cite one I would be very happy to hear about it. Of course you hear about miraculous results here and there, but if you looked at many double blind research studies, quite a few people report positive results when taking placebos, the mind can truly work wonders.Also I have to think if these alternative methods did work, then why aren't they in the mainstream?

You may want to call that ignorance, but I like to call it critical thinking. I mean no disrespect to you wife, but this is how I see it.

You certainly are a coventional voice for Big Pharma. Do stop all that AMA/Allopathic Med. - Western Medicine - arrogance. Allopathic medicine has its place, so does so-called Alternative Med. Herbs and Homeopathy work. I have used them for 25 years.

I know that they pay people to get online and spread disinformation, as you have done here.

You, by asserting this, seek to make a liar out of me.

And furthermore what is this "I researched..." crap as if empirical observation no longer held squat for us?

Ah, to get angry at someone who knows English well... this is somewhere, amid the peace in this country, among these good people, that I have not wanted to go. But you have it coming.

This is happening and anyone who takes the time can easily watch it occur. You take advantage of the frenzy of contemporary life which robs people of their senses, for I guess you know most people lack spare time to observe what happens overhead. So how good is the pay to do that, sigh?

Today's post mentioned: "Treasury is backstopping $600 trillion in derivatives and the Fed and the Treasury are doing the same for the entire structured finance segment. The latter and municipal bonds are essentially frozen. There are few buyers."

$600 Trillion in derivatives ? That's a lot ! I'd heard that there were somewhere between $30 - 700 Trillion worth of 'toxic' derivatives worldwide. The vast distance between these two numbers would seem to indicate a lack of specific knowledge ? Maybe that's because most 'derivatives' are unregulated and held off the regulated balance sheets that are public knowledge(ie: 'Stage 3' assets) ? Today, however, $600 Trillion was mentioned. So I'm wondering... what is the source of info/data that 'backstops' this numerical claim ?

I can't help but question the legitimacy of the following statement by Stoneleigh:

"Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse."

If it gets that bad, mobility away from familiar surroundings and micro-cultures where one has some distinct advantages not to mention friends or family to lean on, to an unfamiliar environment for the sake of landing a better job would not only be an unwise idea, it might be logisitically impossible.

And if property taxes were to get so high that those with the good fortune or financial sense of being able to own their homes outright were unable to hold onto their property after basic neccessities, then to quote a friend of mine "we'd all be at the point of shanking each other in the streets."

The city of Spokane (WA) Valley near where I live was paying $70,000/day for snow removal over a two week span around christmas. I'm guessing they could trim quite a bit of fat before they would be forced to raise property taxes to a level that would oust a majority of property owners.

We wouldn't be communicating to each other via computer right now if we were anywhere close to that point.

Try growing a vegetable garden or raising a pig in your apartment complex.

I appreciate your keen insight. I wish I were feeling stronger, to trade thoughts with you at length. I'm feeling pretty bad right now on a physical level (see above) and the effect also dulls the mind.

Personal detail: I worked on Wall Street for four years, mostly at Goldman Sachs as a temp. As an artist I upbraid myself for having been counterintuitive enough to have headed to NYC for a four year time period precisely bracketed by the first of the Bush dynasty presidencies (88-92), for all things art go to rot under triple deficit policy presidencies. A friend who worked for the collections dept of a major art magazine had 50% delinquency rate on all ads from galleries.

So I spent 2.5 +/- rotten hours on the subway every day to endure what wall street had to deal out to me as one of its "outsourced" people.

After reading about Iran/Contra at length, I began to understand some of what it was I did as a secretary in my various temp assignments. Those pesky clients who seemed not to be able to make up their minds? Little changes to what I thought was the same deal over and over ad nauseum? Upon learning the "financial" techniques employed during Iran/Contra to *raise all those funds* I realized that I had been employed to launder money. Sleeve corporation over sleeve corporation ad infinitum, situated somewhere out in the Cayman Islands more often than not... every one of those "paredido" documents were actually different business entities.

People offered me money as a temp for Goldman Sachs (not the above-mentioned overt money laundering "corporate law firm" for which I worked intermittently as a temp for nearly a year) just to give them insider info on IPOs. I declined not only the money but I refrained from fully informing myself of the nature of the documents. It was too tempting, for they were very mean years in the arts.

Some 500 of the key witnesses during the Iran/Contra era died, too often of such things as boats exploding the day before they were hauled in to testify before Congress. Meanwhile the entire "financial" apparatus chugged on, almost unchecked by the Senate hearings.

To cut to the sucker punch on Wall Street, the whole mechanism has played out before. A good number of the current executive staff are folks who were somehow exhonerated or pardoned (and so on) from their pending incarceration due to their Iran/Contra dealings.

Most of them never did time. Upon taking the helm the reigning president pardoned many of them, and reinstated several among his key cabinet positions (see WIKI). Now that they're back in power, did they forget their tricks? Did they wash their hands of the drug deals for weapons of which many among the state department were convicted? I doubt it.

This is why I am uncurably cynical towards the markets. These are the people who are governing now, their track record engraved with shame.

Which is not to deny your acumen and hearty science at analyzing a world gone bonkers.

I'm sure they work for you as they do for millions of others, just as a placebo would for a research patient. I could give a rats a** about the AMA or "big pharm" I'm not arrogant, I read. The fact is that we as mammals will believe anything because we don't know any better...People used to believe that the sun revolved around the earth, and if you had a good bloodletting now and then, you're good to go! Read this if you have an open critical mind.Homeopathy

No. I'm a scientist. But thanks for playing. Easy way to dismiss someone by labelling them as a "consipracy theorist".

http://www.aapsonline.org/press/nrvacres.htm

They call for a ban on mandatory vaccines because the research and science behind it is incredibly poor. It isn't science at all. It is industry manipulating data to fit what they want. There is a wealth of information on vaccination that goes far beyond the simplistic advertising of pro vaccination groups.

(American medicine the best in the world)Lets end this charade with numbers. I know numbers confuse many people, there being so many of them and all, both people and numbers.

The two major statistics for the measure of a populations health, are longevity and infant mortality.

The USA has the HIGHEST infant mortality and LOWEST longevety of any industrial country on earth.

Don't even start with fatty foods and smoking stats with USA citizens and other countries citizens. French eat butter and creme like its a basic food group, Europeans smoke and drink like Greek and Roman sailors.

American medicine is as corrupted by the same cabal that controls the media and financial sectors, including domestic and foriegn political policy.

Talking about "chemtrails" is absurd and a feeble attempt to distract from the real dangers at your feet and not the false dangers swirling 35,000 feet above your head.

Now I will get chastised for speaking of the 800 lb gorrilla at the breakfast table, the cabal. If he wasn't always pissing in my oatmeal, I wouldn't even make mention.

Nephilim - the reason the US lags in health indicators isn't because of some conspiracy in the medical community, it's because of a ruling class that allows an enormous proportion of the population to languish in poverty and denies them access to basic medical care. It it mostly a determinants of health problem where people with poor living conditions, poor economic prospects, poor education, etc etc, will invariably have poor health status. In today's climate of financial profligacy where trillions are being bandied about to bail out the institutions of the elite, it is shameful that a $10 billion program to support poor children was recently deemed too costly to implement. The same medical science and big pharma interests are extent in the other OECD countries, all of which have better health indicators. They aren't to blame for the poor showing in the US. For that you must look within.

"Talking about "chemtrails" is absurd and a feeble attempt to distract from the real dangers at your feet and not the false dangers swirling 35,000 feet above your head."

35,000 feet overhead? Huhuh. MUCH closer.

You voice something other than the normal human concern here.

This has been so instantly catastrophic to my personal health, so destructive to our way of life, that I couldn't quantify its effect.

One last time addressing you like a human and not some paid troll: this is filling up our sinuses, our eyes with I don't know what - a filmy matter we have to keep rinsing out, making the pets sick, causing us to cough. For another complication it has brought to me, five months now post-surgery from something else, I have been back and forth to the doctor yesterday and have paid for an ultrasound.

And you are treating me like some internet troll who got this from a tinfoil page, while I can go outside and watch these planes zigzag like a bombing fleet over our locality? That, for the first time to this degree in over two years living here?

You would, then, have everyone "consult an authority" before observing with their senses?

It doesn't add up. Your "personality" here is not humanly concerned like the authors of the website and so many posters here.

At this rate, you don't look like a fit. Which of course makes a person wonder all the more about paid trolls bothering this little community of commentors.

Thanks for sympathy anyone who would. This crap has made us very sick, and suddenly so. Internet hoax, indeed.

I think the best description I've read as to what ails the US health system was by Joe Bageant in his book Deer Hunting with Jesus (an unlikely title perhaps, but a very thought-provoking book on American society).

There's something very wrong when even the insured have to think twice before going to the doctor, and insurance companies have the final say on prescribed medicines.

I've lived in the UK and Canada, both of which had good health coverage, although waiting times are an issue in both places. The UK was better. Medicines were free except for a dispensing fee, and even dentistry used to be widely available on the NHS (not any more).

In England I could call my doctor's office at any time of night (when my asthmatic son was having serious breathing difficulties as a baby) and the doctor on call would come to my house. One difference I noticed between there and Canada was that whereas in the UK the doctors were available 24 hours a day and the real estate agents worked 9-5, in Canada it was the other way around. Here you would need to take a sick child to the hospital emergency room in the middle of the night, but your real estate agent would happily come to your house to sign a contract at midnight.

In keeping with Ilargi's unblinking, rigorous investigation of that "veneer of normalcy" in which we've been urged to trust, I suggest there might be a little wising up to be had about the ways of the Ponzi kings.

For those who believe there is no relationship between the food problems, the chemtrails, the insane medical system, the banking rubbish, the brazenly criminal dealings at the top level, the swamping of the planet with weapons and war training sponsored by the same source, and the archthievery of the IMF and kin... There are plenty of other internet sites ready and willing to blow sunshine at you, aren't there? Or why come around where you hate what you read? I have to wonder about *people* who have that kind of time on their hands.

There is substantial evidence for a project that involves spraying “something” over cities thereby making chemtrails. Perhaps they are simply measuring dispersal patterns in various areas under different meteorological conditions. It should be noted that they are concentrating on population centers. Are they preparing for biowarfare, quarantine a city and then fumigate the entire population? I don’t know. Anyone that does know isn’t giving an adequate explanation. Perhaps it’s only one of those make-work programs for military contractors. But I would recommend, just part of your survival pack, to have a good charcoal and hepa filter mask and some way to shelter from “chemicals” rained from the sky.

If the financial realm is as rotten as we have discovered then the intelligence agencies and military are probably equally compromised.

Also, I am a microbiologist and search job listings regularly. The feds have been hiring a lot of microbiologists lately for various programs including bioweapons research. Hope they all have our best interests in mind. Did they in the financial sector? Your call.

If it gets that bad, mobility away from familiar surroundings and micro-cultures where one has some distinct advantages not to mention friends or family to lean on, to an unfamiliar environment for the sake of landing a better job would not only be an unwise idea, it might be logisitically impossible.

That will certainly be true for some. When you own free and clear the choices are harder and it will very much depend on your own individual circumstances. I wouldn't suggest that people automatically sell, even though selling would give them a great deal of liquidity (at a time when liquidity matters most), avoid a large loss on the property (my guess is 90% on average over perhaps 5-10 years), and give them mobility.

There are advantages and disadvantages to being settled where you are. If what you own is a homestead with self-sufficiency potential in an area where you have a good social network, then staying makes a great deal of sense. If it's a place where you might be very dependent on car travel, know relatively few people and have little potential to provide for the essentials of your own existence, then selling you probably be advisable.

We own a homestead free and clear and will not be selling, but then we have invested in a great deal of self-sufficiency here over the years since I saw this coming. We left the UK in 2000 because we felt it's prospects were awful. A 40 acre farm over here cost half what my house in town in England sold for, so I don't feel bad about what I will lose in value on this place. And here I can look after my family with much less need for money than I would have had over there.

And if property taxes were to get so high that those with the good fortune or financial sense of being able to own their homes outright were unable to hold onto their property after basic necessities, then to quote a friend of mine "we'd all be at the point of shanking each other in the streets."

Property taxes will go through the roof in real terms, against a backdrop of a collapsing money supply. Municipalities will be trying to squeeze blood from stones in a vain attempt to keep themselves going in their current form. In a liquidity crunch, money is VERY scarce. Being able to pay for necessities and property taxes is by no means a given in the future.

One of the attractive features about selling now is that you lock in today's property price in cash - cash that will then go ten times as far as you ever imagined it would in a few years (provided you don't manage to lose it in a bank run). You would then be able to afford a great property - perhaps large enough for yourself and your extended family - and still have money left over for taxes and necessities.

The city of Spokane (WA) Valley near where I live was paying $70,000/day for snow removal over a two week span around christmas. I'm guessing they could trim quite a bit of fat before they would be forced to raise property taxes to a level that would oust a majority of property owners.

They will cut back, and the services you receive will shrink to next to nothing over the next few years. That means you will have to do far more at your own expense, or by your own sweat, and you may be vulnerable to all manner of disruptions that you wouldn't experience now. You could be snowed in, you may not be able to travel to purchase supplies, your garbage may not be collected (assuming you were generating any at that point), the quality of your water supply could deteriorate significantly, you may lose power and/or heat. Think through what your dependencies are and who you are dependent on for them. Think about how secure your income really is and how much of a secure cash cushion you have. Think how you might provide necessities for yourself in the case of disruption, and then decide if you want to be tied to where you live now.

We wouldn't be communicating to each other via computer right now if we were anywhere close to that point.

Very true.

Try growing a vegetable garden or raising a pig in your apartment complex.

You can rent many other properties besides apartments, and in any case, renting would be a temporary phase if you look after the equity you extract at today's prices. If you already own a property with the potential for farming, that would be a good reason not to sell (depending on a full assessment of other relevant factors of course).

"We are cautious about the US. At best the US faces a period of weak, below trend growth; at worst, a recession. Basically, US consumers need to spend less, save more, and return their balance sheets to normal. Whilst one could have said this at any time in recent years, the reality is that the background for US consumers was one of ample credit, a healthy jobs market and a solid housing and stock market. Now the credit environment is tightening, housing is fragile and there is more uncertainty about jobs. In such a scenario, one should expect US households to spend less, and if they do this gradually it will be a soft landing, if they cut back dramatically then it will be a recession."

kkallem509 said,"...mobility away from familiar surroundings & micro-cultures....to an unfamiliar environment for the sake of landing a better job would not only be an unwise idea it might be logistically impossible."There is much historical and current evidence that disagrees with you. My own family tree had my grandparents leave all you described above, crossed an ocean with a 2 yr old child, illiterate , no language skills to come to unfamiliar Canada.Ilargi and Stoneleigh are current examples of folks leaving the familiar micro-culture, leaving family. I've seen photos of mothers , starving with child at breast ,fleeing Zimbabwe. I read of desperate young men dying in the attempt to swim from Africa to Spain. Talk to the Italians about their efforts to stop illegal immigrants at sea before they make it to shore...Human history is an unbroken record of tales of exodus,stowaways, daring life threatening journeys to freedom. I have seen photos of people shot attempting to climb over the Berlin Wall...What I hear you saying is that you and your neighbours have no need yet for such actions. I am glad of that. However it would be interesting to know the numbers of American ex-pats. What percentage of the Population? A small number to this day attempt to immigrate to Canada. Some just slip over the border.I can't count the number of nationalities I encounter as I walk about my town. A town started by those leaving the familiar British Empire. I wonder if genetics plays a part. Some people respond to deteriorating conditions by saying ," Let's get the hell out of here!"Others stay put, deeply attached to the familar. When all hope is lost where one is, hope can reside far away, over the fence, in the city...It is truly remarkable to read of the logistic impossibilities overcome.When Stoneleigh writes of the problem of not being able to sell one's house she is speaking of a logistics problem.I have assisted immigrants arriving here with only the clothes on their backs. I think it is preferable to do a little planning ahead.

The Saudi's quoted are right - investment would have to be maintained, even in the face of a demand collapse, in order to avoid a supply collapse to follow. Personally I think investment won't be maintained as it will be both financially and physically impossible to do so. Hence I think we will see a supply collapse that would send oil prices through the roof at a time when very few will have any purchasing power to speak of. That is a recipe for extreme hardship, and also for a hard limit on any kind of eventual recovery.

Thank you. Thank you for your humanity towards us all, in admitting there's an 8,000 lb gorilla in the room.

And I have to say the heck with the internet, in this regard: anyone here, who can possibly dedicate the time to do so, the next time you see these bizarre trails emiting from planes overhead, indeed don't look at the computer. Please walk/drive to the nearest hilltop, and spend an hour just observing what happens. Let's get empirical already about this.

There's a fantastic capacity in NA, maybe because of living indoors over 90% of peoples' lives on account of adverse weather, maybe the decline of edjumacation, whatever, for people to live very abstact lives. Most people don't know the happy quietude of some agricultural or construction pastime which would take them outdoors, and the problem of developing a highly abstracted inner life confounds people's collective awareness.

When I took the first trip to Mexico during my adult life, I was found to be chattering away, analyzing everything and everyone as if giving voice to the pages of some sociologist's rant. A friend was kind enough to tell me (in rather coarse terms, even) to stop thinking and start observing. I was in a situation where this particular person bore down on me a lot about my tendency to "go abstract," which is to say to assume things.

Yes. Abandon the internet the next time you see weird trails coming out of planes (BTW I have it from a knowing source that they are NOT 35K overhead, but close enough to hazard ground fire), go watch. Just watch, at least an hour, please.

I am coming from the POV of someone who, upon first seeing this chemtrail business, went up in the hills to do time lapse photography of the process for a couple of hours as they artificially developed a cloud. I intended to post the material, but the link I posted upthread visually expressed the event much better than I could do with a still camera.

After taking the time for empirical observation, then return to the internet. Don't leave out that step.

Stoneleigh: I hear you. In 2005 we were anxious to sell what was our temporarily extremely valuable farmstead in Montana before the bubble popped. People found us odd, although at the time I supplied them with the sage writings of one of the Iran/Contra confessees which explained the coming trajectory of it all, in order that they might likewise benefit. We had the added impetus of caring for my dying mother, and needing to get cash and take her out of the idiotic "care" system of Montana to somewhere better.

And we came to Mexico to seek an environment in which we could afford to live, in our modest way. Being in Mexico IS our health insurance. I almost died of fibroids, thanks to my in-utero exposure to diethylstilbestrol (DES). Not only when I needed surgery did one of the surgeons drive to our home at 5:30 am to pick us up and take us to the Guadalajara hospital (no small feat given the traffic), not only was the Mexican hospital like a 5 star hotel, entirely clean, with very professional staff, the surgery cost roughly $3,000 US. Being in Mexico IS our health insurance. Had I faced the particular surgery in the US it would have literally cost us all our real estate.

I can't emphasize to those who still have property in the US to consider moving to an economy not entirely based on the doings of planet ponzi.

I know there's an ocean of bad press about Mexico, and I don't recommend Guadalajara's vicinity, but if anyone wants further information I'm here to visit.

Although we may be going out of town if the chemtrails campaign kicks up again like it did yesterday, for however long it takes them to cease this attack. Right now our blue sky is back and they're not up to it at this time.

adios a babilonia , you're living in Mexico, correct? Home of the highest, most stringent pollution control standards in the Western world? That Mexico, right?

The place where honor and ethics drives both Industrial best practices as well as the political system, thus ensuring that no heavy duty toxin dumps occur at random?

I suggest you look for the simplest explanation to your health issues, not singularly complex ones that simply let you avoid the conclusions I would personally draw: there's some environmental toxins caused by non existent environmental standards. Why is this so complicated? Why spin a fun story when the simpler stuff works better?

Otherwise I truly am enjoying your postings in general, a great alternate view of options.

I spent time in South East Asia, where for some reason my eyes were burning and skin itching, that had nothing to do with the vast dome of smog that covered the urban area.

I spent time in Southern Europe, where, after swimming in the Meditaranean routinely, I got this weird infection on my body caused by the toxins dumped into the water for 100 mile radius around the city I lived in, and where a Chemist friend of mine there informed me that he wouldn't enter the water for a 50 mile radius around that town.

Another location I was shown an old industrial plant facility abandoned by the Germans, now fenced in, fully toxic, leaching its wastes into the ground water like a ticking time bomb. If you visited that area, you might be excused for believing you are in heaven for how civilized it is all around there.

Much to agree with there, except for your assessment of chiropractic ;)

Chiros here have 4 years of medical-school style training, many of them after a biology degree. As a former medical researcher myself, I discussed many back problems in very biologically detailed terms with the various chiros I've visited over the years. I am a natural skeptic, but have never found anything questionable about chiropractic.

When I came over from England I had very severe back and neck problems that were sorted out by several years of chiropractic, with no medication or other medical intervention. The treatments got rid of my migraines and gave me back enough strength and range of motion to embark on a rigorous fitness programme (P90X). I am now very strong and fit indeed. Yesterday I did about 250 push-ups and over 100 pull-ups in an hour-long routine. Ten years ago I could no more have done that than flown to the moon under my own steam.

As Michael Ruppert so rightly said, "I deal with conspiracy fact, not with conspiracy theory" (in his film "DENIAL STOPS HERE: From 9-11 to Peak Oil and Beyond").

Regarding discussion on alternative and conventional medicine, both are useful. Conventional medicine is good in emergency situations where symptoms have to be addressed quickly for survival. Not good, though, with chronic conditions or autoimmune disorders, prevention, or in using natural remedies.

When my healthy six year-old son developed asthma in the mid-90s after breathing methyl bromide (pesticide used by corporate farms upwind from us), all the conventional doctors did was to prescribe an inhaler. A friend very knowledgeable in alternative medicine recommended an organic vegan diet and herbs to detox his liver. Well, after three months of the regime, my son was cured. He's a very healthy 19 year-old now who has never used antibiotics. Since then, we eat a 100% organic, plant-based diet. We're all very healthy.

While I do understand the reasoning behind Stoneleigh and Ilgari's advice to rent, I have a slightly different perspective.

I believe, like S & I do, that strong community ties are going to be essential in the times to come. I also believe that achieving some level of energy, food and water independence at home is one of the best preparations we can make in the face of certain shortages of those resources in the future.

The problem with renting is that it's very difficult to build community or achieve any kind of energy/water independence as a renter - especially in a real estate environment where landlords will be defaulting left and right.

My current situation is a case in point. This year our rent went up 35% because our landlord was in a 5-year interest-only ARM that switched over. Of course we considered moving, but we have invested so much time, money and energy in the garden and other systems here that we were loathe to move. Also, rents have actually gone up in this area because so many former homeowners are now renters.

I'm fully aware from conversations with our landlord that he is *this close* to losing this house. If he does, it's almost certain we'll have to move. Which brings me back to my original point. As a renter, how can I build community if I may be forced to move every few years? How much sense does it make for me to invest in solar panels, rainwater catchment, weatherproofing, etc. on a house I don't own?

If things really do get to the point where property taxes spike so high that even "responsible" homeowners (i.e. those that didn't buy on margin, at the top of the bubble, buy more than they could afford, etc.) can no longer afford their homes, hardly anyone *will* be able to afford a home. How can 80% of homeowners be forclosed upon? What's in it for the bank if they can't find anyone else to buy it? It would be in the bank's best interest to renegotiate with the current owner so they at least get something rather than nothing.

The same risks we are all facing in terms of not being able to pay a mortgage (that we lose our jobs or our income dwindles) would affect our ability to pay rent. Assuming we have no debt, and we buy a house that yields a monthly mortgage payment that is the same as what we'd otherwise be paying for rent, the risk we take in buying is just the risk that we might need to sell the house in market conditions that aren't conducive to that. In my mind, that risk needs to be weighed against the benefits of home ownership in building community and food, water and energy independence.